Differences between Right Issue vs Bonus Issue

  • 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.

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Right Issue vs Bonus Issue Infographics

What is the Right Issue?

These are the shares issued by the company to increase the subscribed share capital of the companyShare Capital Of The CompanyShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more through an additional issue.

  • These shares are issuedShares Are IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more 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 shareholdersEnhancement in the value of shares and thus there is no loss on the existing shareholdersIt increases the goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more of the firm and brand perceptionNo 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.

What is Bonus Issue?

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 entityNet Worth Of The EntityThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more.Such shares can be issued out of any of the following accounts:Free ReservesCapital Redemption Reserve accountSecurities Premium Account

Thus, the total number of shares issued as bonuses increases, but the ratio of shares owned by the shareholder remains the same.

  • Capital Redemption Reserve accountSecurities Premium Account

The offering of bonus issuesBonus IssuesBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more  can be positive for the shareholders and thus positively impact the company’s share price offering the shares.

Key Differences Between Right Issue vs Bonus Issue

  • 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.The objective of the rights issueRights IssueThe term “right issue of shares” refers to the offering of shares to all existing Equity or Preference shareholders of the Company in proportion to their current shareholding in the Company.read more 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 sharesOutstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more.Rights shares are offered at a discounted price compared to the market price. Bonus shares are issued to the shareholders free of cost.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.Rights issue permits the renunciation of rights issued either partially or completely, though no such option is available for bonus shares.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.

Right Issue vs Bonus Issue (Comparison)

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

Right Issue vs Bonus Issue – Conclusion

Both Right Shares and Bonus Shares are tactics of increasing the number of shares, thereby enhancing shareholder valueShareholder ValueShareholder’s value is the value that company shareholders receive as dividends and stock price appreciation due to better decision-making by the management that ultimately results in a company’s growth in sales and profit.read more. 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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