Right Issue vs Bonus Issue | Top 6 Differences You Must Know!

• The rights issue is an additional issue of shares by a company for its existing shareholders. The existing shareholders have the 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.

These are the shares issued by the company to increase 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.
• The shareholders must 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 is 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 them in the long run.

These are shares issued as a gift to the existing shareholders depending on the number of shares.

• They are issued free of cost in a specific proportion decided by the company. For example, a bonus issue of 3:1 means that one bonus share is allotted to the shareholder for every three shares held by a shareholder.
• Bonus shares do not inject any fresh capital into the company since they are issued without 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 bonuses increases, but the ratio of shares owned by the shareholder remains the same.

The offering of bonus issues can be positive for the shareholders and thus positively impact the company's share price offering the shares.

1. 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 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.
2. The objective of the rights issue is to pump in additional capital in the company compared to bonus shares that aim to increase active trading through an increase in the number of outstanding shares.
3. Rights shares are offered at a discounted price compared to the market price. Bonus shares are issued to the shareholders free of cost.
4. Rights shares are either partly paid or fully paid up depending on the proportion of the paid-up value of equity shares when further issues occur. On the other hand, bonus shares are always fully paid up.
5. Rights issue permits the renunciation of rights issued either partially or completely, though no such option is available for bonus shares.
6. The base of shareholders can increase in a rights issue if the existing shareholders do not accept them and somebody else accepts it. However, bonus shares are only given to the existing list of shareholders.

Let us have an understanding of the differences between Right Shares and Bonus Shares:

Both Right Shares and Bonus Shares are tactics of increasing the number of shares, thereby enhancing shareholder value. Though rights issues come at a lower 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, infographics, comparison table, and practical examples. You may read through the following recommended articles on Corporate Finance –

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