Discussion Topic: Rights Issue vs Bonus Issue
Today, we will discuss one of the most confusing and misunderstood topic of the stock market. Bonus issue and Rights issue both looks very similar to each other, but actually, they are totally different. In this article, we will make clear all the differences between rights issue vs bonus issue so that you don’t get confused while taking any important investment decision.
An Introduction to Bonus Shares and Rights Shares:
When a company holds a large amount of distributable profits but don't want to issue cash dividends, it transforms such profits into shares and distributes those among the shareholders, in a proportion to their existing holdings. For bonus shares, shareholders are not required to pay any money to the company. It's just like a free gift.
Contrary to this, when a publicly listed company offers additional shares to their existing shareholders in exchange for money is called rights issue. This is just like selling shares to existing shareholders at a discounted price to raise funds from the market.
Before going deep into the difference between rights issue vs bonus issue, let us first look into their meanings and descriptions.
What is Bonus Issue of Shares?
Bonus Shares (or Bonus issue or shares) refers to free shares issued to the existing shareholders of the company, in a proportion to the number of shares held by the shareholder. For example, if a company declares 1:2 bonus issue, then it means all the existing shareholders will get one additional share for every 2 shares they hold.
Bonus Shares are distributed as an alternative to paying cash dividends. Shareholders are allowed to sell these bonus shares to meet their income needs.
The bonus issue of shares only increases the total number of outstanding shares, but it does not change the company's net worth. Though the bonus issue increases the total number of shares issued by the company, the ratio of shares owned by the shareholder remains same.
Bonus shares do not inject fresh working capital into the company, as they are distributed among the shareholders without any consideration.
The above statements may sound similar to the stock split, but they are different in many ways.
Issuing bonus shares is an option for the companies to increase short-term liquidity. This can be thought of as an indirect solution for cash limitations since it prevents the outflow of money in the form of dividends while increase short-term liquidity of stocks.
To learn more about bonus issue, check our guide on what is bonus issue of shares.
What is Rights Issue of Shares?
Right shares (or rights issue of shares) are fresh shares which are offered by the company to the existing shareholders, with an aim to raise more capital from the market. The right shares are primarily offered to the current equity shareholders at a discounted price.
The company sends formal notices to each shareholder, stating that the company giving a chance to him/her to buy more shares at discounted prices. The shareholders are then required to inform the company about the quantity of shares they want to buy.
For example, a company may declare rights issue of 2:3 at $100 per share, where the current market price is at Rs 150 per share. This means the company is issuing two rights shares for every three shares owned by the shareholders of that company at $100 per share.
The shareholders have the option to either subscribe in full, or subscribe partially, or they can sell the rights to someone else, or even they can completely ignore the rights issue.
To learn more about bonus issue, check our guide on what is rights issue of shares.
Key Differences Between Rights Issue and Bonus issue:
Bonus shares refers to the shares that are issued to current shareholders, out of free reserves created from genuine profits. On the other hand, the company offers right shares to the existing shareholders to raise additional capital from the market as a limited time offer.
Bonus shares are given to the shareholders free of cost, while right shares are offered to the shareholders at a discounted price.
The primary objective of the right issue is to fetch additional capital to the firm. Whereas, the bonus issue aims to increase the liquidity by increasing the number of outstanding shares.
The facility of the defection of rights is available for the right shares, in which the shareholders can give up their rights. However, no such option is available in case of bonus issue.
Bonus shares are always fully paid up, whereas right shares can be either fully paid up or partly paid up.
To avail the benefits of the rights issue, a minimum subscription is mandatory, while no such subscription is required in case of bonus issue.
Bonus Issue vs Rights Issue (Comparison)
|BASIS FOR COMPARISON||RIGHTS ISSUE||BONUS ISSUE|
|Meaning||Right shares are offered to the existing shareholders in a proportion to their existing holdings. Rights can be bought at a discounted price, within a stipulated time period.||Bonus shares are shares issued by the company to their existing shareholders for free. It is issued in the proportion of their existing holdings.|
|Objective||To raise fresh capital from the market.||Issued as an alternative to dividend payment. Also used to bring down the share price.|
|Price||Offered at a discounted price.||Issued free of cost|
|Renunciation||Shareholders may fully or partly renounce their rights.||No such options|
|Minimum subscription||Required if you want to buy rights shares.||Not Required|
|Paid up value||Can be either fully or partly paid up.||Always fully paid up.|
|Cash Receipt||Results in cash receipt for the company||Does not result in cash receipt.|
|Share Price||Does not affect the share price.||Bring down the share price according to the proportion.|
Rights Shares vs Bonus Shares: Final Thoughts
Companies consider the issue of rights shares when they are in a need for more cash, whereas bonus shares are issued as an alternative to dividend to restrict cash outflow. Both rights shares and bonus shares increase the number of outstanding shares, thus increases the liquidity.
These days we do not notice companies issuing rights shares or bonus shares to shareholders. Moreover, in many cases, companies prefer to split stocks instead of issuing bonus shares.
We hope that you have enjoyed the above article describing the Rights Issue vs Bonus Issue of shares. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about the difference between the rights issue and bonus issue. Also, let us know if you have received and rights issue or bonus from any company in recent past.