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Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change.
A Bonus Rights Issue, which is sometimes referred to as "Bonus Rights" is effectively an alternative way to process a Stock Dividend. In a Bonus Rights Issue, the company issues "rights entitlements" to existing shareholders. These "rights entitlements will be listed for a limited amount of time on the stock exchange, allowing shareholders in need of liquidity to sell their rights. After a while when trading has stopped, all rights will be mandatorily assimilated into the newly issued shares often with a ratio applied. This assimilation will happen automatically for shareholders. Shareholders who have an amount of "entitlement rights" that are not divisible by the ratio, can sell off the redundant "entitlement rights" during the trading period and sometimes there is a facility in the market to cash-compensate for fractional rounding.
Example of a Bonus Rights (source investigate.co.uk):
Board of Directors of UBS AG determines exchange ratio for stock dividend
Zurich/Basel, 16 April 2008 - The Board of Directors of UBS AG has determined an
exchange ratio of 20:1 for the stock dividend. Every registered share of UBS AG
will be allocated one tradable entitlement. Twenty entitlements will enable the
holder to acquire one new registered share of UBS AG for free.
Based on the decision made by the Extraordinary General Meeting on 27 February
2008 to create authorized capital for the distribution of a stock dividend, the
Board of Directors of UBS AG has determined the exchange ratio for the stock
dividend at 20:1. Every registered share of UBS AG with a nominal value of CHF
0.10 will be allocated one tradable entitlement. Twenty entitlements give the
holder the right to receive one new share of UBS AG with a nominal value of CHF
0.10 for free.
Every shareholder holding shares of UBS AG on 25 April 2008 after close of
business will receive one tradable entitlement for each share held. The
entitlements are expected to be traded on SWX Europe from 28 April 2008 up to
and including 9 May 2008. Entitlements held after the entitlement trading period
will be automatically exchanged into new shares on or around 15 May 2008 at the
ratio of 20:1. The first trading day of the new shares created as a result of
the stock dividend is expected to be 19 May 2008.
A company calls a Bonus Rights Issue if it is in liquidity problems. By paying stock to existing shareholders they don't need cash. However, to provide shareholders with a chance to receive cash (by selling their rights), the company provides an alternative. A second reason why a company might opt for this scenario is when there is doubt about the value of the newly issued shares.
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