Difference between Right Issue and Bonus Issue

Difference between Right Issue and Bonus Issue

4 mins readComment
Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Jun 17, 2024 18:46 IST

The key difference between bonus issue and rights issue lies in their purpose and impact on shareholders. A bonus issue offers additional shares to shareholders for free, using the company's reserves. In case of rights issue, shareholders purchase new shares at a discount. It aims to raise fresh capital for the company. 

Imagine XYZ Corporation wants to reward its shareholders. It opts for a Bonus Issue, giving them free additional shares proportionate to their current holdings at no extra cost. Alternatively, if XYZ needs more capital, it might choose a Rights Issue, offering shareholders a chance to buy new shares at a lower price, thereby raising funds while allowing shareholders to increase their investment.

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Table of Content

Comparative Table: Bonus Issue and Right Issue

Aspect

Bonus Issue

Rights Issue

Definition

Issuance of additional shares to existing shareholders without any cost.

Offering new shares to existing shareholders at a discounted price.

Purpose

To capitalize on the company's reserves by increasing the share capital.

To raise additional capital for the company's growth and development.

Cost to Shareholders

Free of cost; shareholders pay nothing to receive bonus shares.

Shareholders must pay to purchase new shares at the offered price.

Effect on Share Price

This can lead to a decrease in the share price due to an increase in the number of shares.

Might not significantly affect the share price, as new shares are offered at a discount.

Shareholder's Equity

No change in the shareholders' equity, as reserves are converted into share capital.

Increases as shareholders infuse additional funds into the company.

Eligibility

All existing shareholders are eligible for bonus shares.

Shareholders have the right, but not the obligation, to buy new shares.

Dilution of Ownership No dilution of ownership as no additional funds are raised. Potential dilution if not all shareholders exercise their rights to purchase new shares.

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What is Bonus Issue?

A Bonus Issue is like a reward to shareholders from a company. It involves giving out extra shares to existing shareholders for free. Instead of paying cash dividends, a company converts its profits or reserves into shares and distributes them. Each shareholder gets additional shares based on the number they already own, but the overall value of their investment stays the same because the total number of shares increases. It's a way for companies to encourage long-term investment without spending cash.

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What is Right Issue?

A Rights Issue is a way for companies to raise extra money by offering new shares to their existing shareholders. Shareholders get the "right" to buy these new shares, usually at a lower price than the current market value and in proportion to the shares they already own. It's like getting a first choice to increase your investment in the company at a discounted rate. The idea is to give loyal shareholders a chance to invest more before the company offers shares to others outside the existing shareholder base. This method helps companies raise funds while allowing shareholders to potentially increase their stake at a lower cost.

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Difference Between Bonus Issue and Right Issue

Definition: Bonus Issue is the free distribution of additional shares to existing shareholders, while Rights Issue is an offer to buy additional shares at a discounted price.

Cost to Shareholders: Bonus Issue involves no cost to shareholders; Rights Issue requires shareholders to pay for the new shares.

Purpose: Bonus Issue aims to reward shareholders and capitalize reserves; Rights Issue aims to raise additional capital.

Shareholder's Equity: In Bonus Issue, shareholder's equity remains constant; in Rights Issue, it increases with the purchase of new shares.

Effect on Share Price: Bonus Issue can dilute share price by increasing share quantity; Rights Issue may not significantly affect the price due to the discounted offer.

Dilution of Ownership: No ownership dilution in Bonus Issue; potential dilution in Rights Issue if not all shareholders participate.

Eligibility: All existing shareholders automatically receive Bonus Issue shares, while Rights Issues allow shareholders to purchase additional shares.

Conclusion!!

While both Bonus and Rights Issues are methods companies use to engage with shareholders, they serve different purposes. Bonus Issues reward existing shareholders with additional free shares, diluting the share price without raising new capital. Rights Issues, on the other hand, offer shareholders a chance to buy new shares at a discount, directly raising fresh capital for the company.

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Top FAQs on Difference between Right Issue and Bonus Issue

What is a Rights Issue?

A rights issue is an offer to existing shareholders to purchase additional shares in the company at a discounted price, usually to raise capital.

What is Bonus Issue?

A bonus issue involves the distribution of additional shares to existing shareholders at no extra cost, based on the number of shares they already own, typically from the company's retained earnings.

How do Rights Issues and Bonus Issues differ in purpose?

Rights issues aim to raise fresh capital for the company, while bonus issues are a way to reward existing shareholders and increase the liquidity of shares without changing the company's equity.

What impact do right issue and bonus issue have on share price?

Rights issues might lead to a dilution of share value if not fully subscribed, whereas bonus issues tend to increase the share's affordability without affecting the company's market capitalization.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio