Right Issue vs Bonus Issue

Difference Between Right Issue vs Bonus Issue

Rights Issue is a right issued to its existing shareholders to subscribe to the shares at a discounted price within a specified time period. A bonus issue is an issue of shares by the Company to its existing shareholders free of cost. It is issued in relation to no. of shares held by the shareholders. In this topic, we are going to learn more about the Right Issue vs Bonus Issue.

What is the Right Issue?

A Rights issue is an offer/choice given by the Company to its existing shareholders to purchase the additional fresh shares in the Company. This is a right given to the existing shareholders to buy additional shares at a discounted price than the market price; they can exercise the right within a stipulated time frame. Any shareholder who exercises the rights can buy the shares and increase their shareholding in the Company. Post rights issue the number of shares increases, and it dilutes the value of the share, and in turn, affect the share price in the market.

A rights issue is mainly offered in order to raise additional capital. The raised capital can be used for any business needs or settlement of existing debts.

Rights given to shareholders can also be used in three ways (1) Use the rights and purchase additional shares, (2) Ignore the rights, or (3) Sell the rights to other parties.

Example:

ABC Corp has decided to make rights issue. It declared a rights issue of 1:2 at $1000 per share, where the market price of the share is $1300 per share. The company is willing to issue one rights share for every two shares held by the existing shareholder.

So now shareholders have the choice to use the rights completely, or they can renounce their rights partially or fully.

What is Bonus Issue?

A bonus issue is additional shares offered to the existing shareholders at no cost (i.e.) free shares. Instead of paying dividends to the shareholders, Company can issue bonus shares. Bonus shares are issued in proportion to no. shares already held by the existing shareholders. (Eg.) One bonus share will be issued for every five shares held (1:5). Shareholders’ equity does not dilute with respect to bonus shares as shares are issued in the same proportion, and the equity% will remain the same as before.

A bonus issue is considered when the Company cannot payout to the shareholders due to financial crunch or to restrict cash outflow and at the same time to meet the expectations of the shareholders. Bonus issue does not involve any cash outflow, and it only increases the company’s share capital. Post Bonus issue, the company’s share price will reduce in the market as the number of shares increases. It will create more liquidity to the shareholders as they can sell the shares in the market and get cash. Additionally, shares become more affordable in terms of price to retail investors.

Example:

X Corp has decided to make a bonus issue in the ratio of 1:2. It means for every two shares held by existing shareholders; additionally, one share is issued at free of cost. This will increase the liquidity in the market and restrict the company’s cash outflow to the existing shareholders.

Head To Head Comparison Between Right Issue vs Bonus Issue (Infographics)

Below is the top 9 difference between Right Issue vs Bonus Issue:

Similarities Between Right Issue vs Bonus Issue

• Both Rights Issue and Bonus Issue are made to the existing Shareholders.
• Both the issues increase the no. of shares outstanding and the Share capital of the Company.
• Both are Ordinary classes of Shares.
• Both the issues increase the liquidity in the market for the shareholders to transact easily.
• Shareholders are benefitted from both issues as one comes at a discounted price and one comes at free of cost.

Key Summary

Rights issues and bonus issues are issued by the company for different purposes. On a macro level, both the issues increase the no. of outstanding shares in the market, and it enhances shareholder value. Rights issue comes at a discounted price, whereas bonus issue is free of cost. The company’s management uses the right strategy based on the needs of the business and shareholders.

A rights issue is preferred when the company is in need of funds for business activities and repayment of the debt, whereas a bonus issue is considered as an alternative to dividend outflow in order to restrict the cash outflow.

Right Issue vs Bonus Issue Comparison Table

Below is the 9 topmost comparison between Right Issue vs Bonus Issue:

Rights Issue	Bonus Issue
Issued to existing shareholders as a right to buy additional shares at a discounted price within a specified period of time.	Issued to existing shareholders at free of cost in proportion to their existing shareholding.
Additional shares are created for the purpose of the issue.	Shares are issued from free reserves, capital redemption reserve A/c, and/or securities premium A/c.
The purpose is to raise additional capital for the company.	The purpose is to pay shareholders in the form of shares instead of dividends and also to bring down the share price in the market and make it more affordable to Investors.
A minimum subscription is needed for the rights issue as shareholders need to pay for the issue.	It is not relevant as shares are issued at no cost to the existing shareholders.
Rights can be fully utilized or rejected partly or completely	There is no such need or option.
Rights issues can be fully paid up, or party paid up.	A bonus issue is always fully paid up.
Issued at a discounted price than market value	Issued as free shares (No cost)
The company receives cash from the shareholders.	There is no such transaction.
Share price can be affected to some extent due to dilution in the value of the shares.	Share prices reduce according to the proportion of bonus shares.

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