Right vs Bonus Shares: Difference and Comparison

Rights shares are offered to existing shareholders at a discounted price to raise additional capital. In contrast, bonus shares are free shares issued to existing shareholders in proportion to their current holdings without requiring payment.

Key Takeaways

1. Rights shares are new shares issued to existing shareholders at a discounted price, while bonus shares are additional shares given to shareholders for free based on their current holdings.
2. Rights shares allow companies to raise additional capital from existing shareholders, whereas bonus shares capitalize a portion of the company’s reserves without raising new money.
3. Rights shares can be traded or transferred, giving shareholders flexibility, while bonus shares are non-transferable and must be held by the existing shareholder.

Right Shares vs Bonus Shares

Rights shares are new shares of stock issued by a company to its existing shareholders,  in proportion to their existing holdings. Bonus shares are additional shares of stock that a company issues to its existing shareholders, but are not sold for cash.

Right shares require a minimum subscription, but bonus shares do not require a minimum subscription.

Comparison Table

Aspect	Rights Shares	Bonus Shares
Purpose	To raise additional capital from existing shareholders by issuing new shares at a discounted price.	To capitalize retained earnings and distribute additional shares to existing shareholders without raising new capital.
Issuance	Issued at a price lower than the current market price (discounted) to incentivize existing shareholders to subscribe to them.	Issued to existing shareholders free of charge, with no cost involved.
Shareholder Decision	Shareholders have the choice to subscribe to the rights shares, and their decision can affect their ownership stake in the company.	Shareholders receive bonus shares automatically without any choice or financial commitment.
Dilution of Ownership	Subscribing to rights shares may result in dilution of ownership for existing shareholders who do not participate.	Bonus shares do not lead to dilution of ownership because they are distributed in proportion to existing shareholdings.
Funding Source	Rights shares provide a source of capital for the company, which can be used for various purposes, such as debt reduction or funding expansion.	Bonus shares do not provide additional funds to the company since they involve the redistribution of existing equity.
Market Reaction	The issuance of rights shares may lead to short-term price adjustments, as the market reacts to the new shares and the discount.	Bonus shares may have a positive impact on the company’s stock price, as they reflect retained earnings and may be seen as a sign of financial strength.
Regulatory Approval	Typically, companies issuing rights shares require regulatory approval and must comply with specific disclosure and pricing regulations.	Issuing bonus shares may have fewer regulatory requirements and may not require approval in some jurisdictions.
Purpose Disclosure	Companies issuing rights shares disclose the specific purpose for raising capital and how the funds will be utilized.	Companies issuing bonus shares disclose that they are capitalizing retained earnings but may not specify the exact use of capital.
Taxation	In some jurisdictions, subscribing to rights shares may have tax implications for shareholders, depending on local tax laws and regulations.	In many jurisdictions, the issuance of bonus shares is not subject to immediate taxation for shareholders, as it reflects a capitalization of retained earnings.

What are Right Shares?

Right shares refer to a type of offering made by a company to its existing shareholders, granting them the opportunity to purchase additional shares at a predetermined price. This method allows current shareholders to maintain or increase their ownership percentage in the company.

Key Features of Right Shares

1. Pre-Emptive Rights: Right shares provide existing shareholders with pre-emptive rights, ensuring they have the first option to buy new shares before they are offered to the public. This helps in safeguarding the interests of current investors.
2. Discounted Price: Companies offer right shares at a discounted price compared to the market value. This discount serves as an incentive for existing shareholders to participate in the offering and capitalize on the opportunity to acquire more shares at a favorable rate.
3. Maintaining Ownership Control: Right issues enable current shareholders to prevent dilution of their ownership stake. By exercising their right to purchase additional shares, they can ensure that their proportional ownership in the company remains unchanged or increases.
4. Capital Infusion: For the issuing company, right shares serve as a means to raise additional capital. This capital infusion can be used for various purposes such as funding expansion projects, reducing debt, or supporting research and development initiatives.

Process of Right Share Issuance

1. Board Approval: The decision to issue right shares begins with the approval of the company’s board of directors. They determine the number of shares to be issued, the subscription price, and other relevant details.
2. Announcement to Shareholders: Once approved, the company informs its existing shareholders about the upcoming right share offering through a formal announcement. This includes details about the number of shares available, the subscription price, and the timeline for exercising the pre-emptive rights.
3. Subscription Period: Shareholders are given a specific period, known as the subscription period, during which they can exercise their right to purchase additional shares. This window allows them to decide whether to take advantage of the offering.
4. Trading of Rights: In some cases, shareholders who do not wish to subscribe to the right shares have the option to sell their rights to other investors in the secondary market.
5. Allotment: At the end of the subscription period, the company allots the newly issued shares to shareholders who exercised their right to purchase. Shareholders who did not participate may experience dilution of their ownership stake.

What are Bonus Shares?

Bonus shares, also known as scrip dividends or capitalization issues, refer to additional shares distributed by a company to its existing shareholders without any consideration in cash. This process is a form of corporate action that enhances the equity base of the company.

Issuing Bonus Shares

Companies issue bonus shares as a strategy to reward existing shareholders and boost shareholder value. The issuance is proportionate to the current shareholding, meaning that shareholders receive additional shares in proportion to their existing holdings. For example, if a company announces a bonus issue of 1:1, shareholders receive one additional share for each share they already own.

Purpose and Benefits

1. Capitalization of Reserves: Bonus shares are issued by capitalizing the company’s reserves, such as retained earnings or surplus. This allows the company to convert its accumulated profits into additional shares, reinforcing its financial structure.
2. Enhancing Liquidity: By increasing the number of shares in circulation, bonus issues aim to enhance liquidity in the stock market. A higher number of tradable shares can potentially attract more investors and improve overall market activity.
3. Shareholder Value: Bonus shares are a way for companies to share their success with existing shareholders without affecting their cash position. This can be viewed as a gesture to reward loyal investors and build confidence in the company.
4. Signal of Confidence: The decision to issue bonus shares is seen as a positive signal by investors. It indicates that the company is confident about its future earnings and is willing to reinvest its profits back into the business, which can foster investor trust.

Main Differences Between Right Shares and Bonus Shares

1. Purpose:
   • Right Shares: Issued primarily to raise additional capital from existing shareholders. The company offers these shares at a discounted price to incentivize shareholders to subscribe to them.
   • Bonus Shares: Issued as a reward to existing shareholders, from the company’s retained earnings. Bonus shares do not raise new capital for the company.
2. Pricing:
   • Right Shares: Offered at a price lower than the current market price of the company’s stock to encourage shareholders to participate.
   • Bonus Shares: Distributed to existing shareholders free of charge, without any cost.
3. Shareholder Decision:
   • Right Shares: Shareholders can choose to subscribe to the right shares, and their decision can affect their ownership stake in the company.
   • Bonus Shares: Shareholders receive bonus shares automatically without any choice or financial commitment.
4. Ownership Dilution:
   • Right Shares: Subscribing to right shares may lead to dilution of ownership for existing shareholders who do not participate, as their ownership percentage may decrease.
   • Bonus Shares: Bonus shares do not dilute ownership because they are distributed proportionately to existing shareholdings.
5. Funding Source:
   • Right Shares: Provide a source of capital for the company, which can be used for various purposes, such as debt reduction or funding expansion.
   • Bonus Shares: Do not provide additional funds to the company since they involve redistributing existing equity.
6. Regulatory Approval:
   • Right Shares: Often require regulatory approval, and companies must comply with specific disclosure and pricing regulations.
   • Bonus Shares: May have fewer regulatory requirements and may not require approval in some jurisdictions.
7. Market Impact:
   • Right Shares: Issuing right shares may lead to short-term price adjustments as the market reacts to the new shares and the discount offered.
   • Bonus Shares: Bonus shares may positively impact the company’s stock price, as they reflect retained earnings and may be seen as a sign of financial strength.
8. Taxation:
   • Right Shares: Subscribing to right shares may have tax implications for shareholders, depending on local tax laws and regulations.
   • Bonus Shares: In many jurisdictions, the issuance of bonus shares is not subject to immediate taxation for shareholders, as it reflects a capitalization of retained earnings.