Differences between Right Issue vs Bonus Issue
- The rights issue is an additional issue of shares by a company for its existing shareholders. The existing shareholders have their right to subscribe to these shares unless some special rights reserve them for any other individuals.
- On the other hand, when a firm earns the supernormal amount of profits, these are converted into Capital and divided amongst the shareholders free of cost in a proportion of their respective holdings.
Right Issue vs Bonus Issue Infographics
What is the Right Issue?
These are the shares issued by the company with the purpose of increasing the subscribed share capital of the company through an additional issue.
- These shares are issued to the existing equity shareholders through notices to every shareholder.
- It gives the choice of purchasing the shares at the discounted prices by the company within a stipulated time frame.
- The shareholders are required to confirm the number of shares opted within the given period.
- These rights can be forfeited either completely or partially enabling the company to issue these additional shares to selected investors or the general public on a preferential basis through a special shareholder resolution.
The benefits of the rights issue are:
- Increased control of the existing shareholders
- Enhancement in the value of shares and thus there is no loss on the existing shareholders
- It increases the goodwill of the firm and brand perception
- No cost involved with the issuance of shares
There are a couple of drawbacks to the same:
- There tends to be a dilution in the value of shares due to an increase in its numbers
- It does offer a temporary solution to management issues but may not necessarily guide in the long run.
What is Bonus Issue?
These are shares issued as a gift to the existing shareholders depending on the number of shares held by them.
- They are issued free of cost in a specific proportion decided by the company. For e.g. a bonus issue of 3:1 means that for every 3 shares held by a shareholder, one bonus share is allotted to the shareholder.
- Bonus shares do not inject any fresh capital into the company since they are issued without any consideration. It also does not make any changes to the net worth of the entity.
- Such shares can be issued out of any of the following accounts:
- Free Reserves
- Capital Redemption Reserve account
- Securities Premium Account
Thus, the total number of shares issued as bonus issue increases but the ratio of shares owned by the shareholder remains the same.
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The offering of bonus issues can be positive for the shareholders and thus positively impact the share price of the company offering the shares.
Key Differences Between Right Issue vs Bonus Issue
- Rights shares are offered to the existing shareholders by the company for raising additional capital from the market. This has to be done within a stipulated time period. On the other hand, bonus shares are given to the shareholders out of the free reserves created from additional profits made by the company during the year.
- The objective of the rights issue is to pump in additional capital in the company as compared to bonus shares which aim to increase active trading through an increase in a number of outstanding shares.
- Rights shares are offered at a discounted price compared to the market price. Bonus shares are issued to the shareholders free of cost.
- Rights shares are either partly paid or fully paid-up depending on the proportion of the paid-up value of equity shares when the further issue takes place. On the other hand, bonus shares are always fully paid up.
- Rights issue permits the renunciation of rights which have been issued either partially or completely, though no such option is available for bonus shares.
- The base of shareholders can increase in a rights issue if they are not accepted by the existing shareholders and somebody else accepts it. However, bonus shares are only given to the existing list of shareholders.
Right Issue vs Bonus Issue (Comparison)
Let us have an understanding of the differences between Right Shares and Bonus Shares:
|The basis for Comparison between Rights Issue and Bonus Issue||Rights Shares||Bonus Shares|
|Meaning||Shares available to existing shareholders equal to their holdings which can be bought at a discounted price for a definite period of time.||These are shares issued by the company to the existing shareholders in a specific proportion of their holdings, free of cost.|
|Creation||These are additional shares created||Created out of accumulated profits and reserves.|
|Purpose||To raise new/fresh capital for the company.||To bring the market price of the shares within attractive ranges.|
|Minimum Subscription||It is mandatory||It is not necessary.|
|Renounce||Rights can be renounced either completely or partially||No such option exists|
|Paid-Up Value||Either fully paid or partly paid||Always fully paid up.|
Right Issue vs Bonus Issue – Conclusion
Both Right Shares and Bonus Shares are tactics of increasing the number of shares in the market thereby enhancing shareholder value. Though rights issues come at a less cost, bonus shares are given free of cost. Thus, depending on the decisions of the senior management and position of the company in the industry, the respective strategy can be pursued.
This has been a guide to the Right issue vs bonus issue. Here we discuss the top differences between the right issue and bonus share issue along with infographics, comparison table, and practical examples. You may read through the following recommended articles on Corporate Finance –