Price of a share

(1. Issue price is the price of shares when the shares are issued by the company, and a company has a right to decide whatever price they want to issue their share worth for?) Yes, but …

(2. BUT the issue price cannot be less than nominal value because it is the minimum price of a share and we cannot issue less than that?) OK – I’m just not sure what you mean by ‘the minimum price of a share’. I may need to come back to this point

(3. The nominal value of a share is a minimum price of a share that it can be worth and anything below this would be illegal?) NO! Where market price falls below nominal value would probably be unfortunate but it’s certainly not illegal

(4. Nominal value is decided as an pre-incorporate activity and this price is written in the company’s constitution and registered and submitted to the Registrar?) Correct

(5. Market price is the price of a share in the market and it is a price at which a buyer and seller will trade their shares transaction?) Essentially correct

(6. Right price is a discounted price at which new shares are issued and they have to be less than the market price of the shares currently trading in the stock exchange?) Rights price (not right price). I don’t think there is any law that says the rights price must be below the market price but it’s unlikely that a rights issue would be successful where the rights price was higher than market price! Ask yourself, who would take up the rights and pay $2 per share rights price when they could increase their holding by paying $1.50 to buy on the market?

(7. Could you please explain me the primary reasons why the rights shares and bonus shares are issued by a company?) A rights issue will probably be considered by the company in order to increase their pool of liquid assets (ie cash)

A bonus issue could be (a) to tidy up the Statement of Financial Position by the capitalisation of non-distributable reserves or (b) simply to reduce the market value of shares on the stock market in order to attract many more potential investors. If there are 2 million shares in issue and the company has a market value per share of $3 and the company decides to have a 1 for 1 bonus issue, there would then be 4 million shares in issue. But the net assets of the company has not changed (no money changes hands in a bonus issue)

So that pre-bonus issue market capitalisation of 2 million x $3 = $6 million would then become 4 million x $1.50 = $6 million.

Personally, if I had $3,000 to invest, in my mind I would prefer to buy 2,000 shares at $1.50 than just 1,000 shares at $3

The point (a) above would involve double entry accounting of Dr Share Premium Account (or Capital Redemption Reserve or some other non-distributable reserve) and Cr Share Capital

OK?

(1) IF shares are issued at an issue price of $1 and nominal is also $1 then issue price is equal to nominal price?) Correct

(2) IF shares are issued at premium then issue price is greater than nominal price. For eg issue price is $2.50 nominal price is $1 then extra of $1.50 is premium?) Correct

(3) IF shares are issued at discount then we compare issue price with market price (and not with a nominal value). The issue price must be less than market value. For eg issue price is $1 and market value is $2 then the discount is $1?) ISSUE AT A DISCOUNT is applied in a comparison between Nominal Value and Issue Price. AND ISSUE PRICE CANNOT BE LOWER THAN NOMINAL VALUE.

(4) The right shares is issued at discount where we always compare right issue price with a nominal value. For eg a company issues right shares with an issue price of $8 and nominal value is $10?) NO, NO, NO!!! In a rights issue, the asking price / issue price will obviously be lower than market value BUT CANNOT BE LOWER THAN NOMINAL VALUE. Rights issue price of $8 will be lower than market value (possibly $10?) but MUST be higher than nominal value (probably $1)

OK?

Syed, I’m containing my frustration here because you are repeatedly using an expression that I would prefer you didn’t!

In all my many years of teaching law to aspiring accountants, the expression of ‘issuing shares at a discount’ has ALWAYS been used in the context of ‘the issue of shares at an amount that represents proceeds of share issue being lower than NOMINAL VALUE’

So the use of the word ‘discount’ has always, at least in my mind, been associated with nominal value. Not market value!

So I’m going to move forward now on this basis.

It is illegal for a company to issue shares at a discount. Period. Full stop. End of story.

Now, let’s consider the situation where a company wishes to raise money by way of a rights issue. First off, I’m going to assume that the NOMINAL value of the company’s shares is £1. I’ve got this out of the way merely to emphasise that whatever price the rights issue shares are to be issued at, the price for each new share to be issued CANNOT be lower than £1

Let’s assume that the company’s shares, pre-rights, are being traded on the stock exchange at £2.40 and the company offers to its existing shareholders the opportunity to buy more share on the basis of 1 new share for every 2 shares currently held. That would be a 1 for 2 rights issue. The company can ask any price for the new shares that it wants to ask.

Common sense tells you that it would be stupid to ask for an amount greater than £2.40 and we have already emphasised that the asking price cannot be lower than £1. So? Anywhere in between those two figures would be acceptable

Let’s settle on an asking price of £2. Previously, you have referred to this difference of 40 pence (£2.40 – £2.00) as a discount and this appears to me to be what is causing your confusion. I would rather call it a ‘saving’ or a ‘reduction’

Now I’m going to lower the amounts involved and have a company’s share price on the market of £1.15. It wishes to effect a rights issue and offers new shares to its existing shareholders on the basis of 1 for 2 at a price to be paid for the new shares of 95 pence. This is 20 pence lower than the market price so quite an attractive proposition. A ‘saving’ of 20 pence or a ‘reduction’ of 20 pence when compared with market value.

IT WOULD ALSO BE ILLEGAL! Because here we have a company about to issue shares at a discount ON NOMINAL VALUE and that is not allowed, 95 pence being lower than the £1 nominal value

Now! Has this cleared up your confusion (I suggest that you, in your own mind, differentiate between a ‘discount on nominal value’ and a ‘saving on market value’)

Let me know if you still have issues with this topic!

OK?