October 25, 2023

Difference Between Right Issue And Bonus Issue

Difference Between Bonus Issue And Right Issue

The main difference between the bonus issue and the right issue is that the bonus issue is the free and extra allocation of shares to existing shareholders as a reward, whereas the rights issue is shares offered to existing shareholders at a discounted price. The simplest way to understand the difference is by knowing that the bonus issue is shares that the companies offer to existing shareholders for free, whereas the right issue is shares that are offered at a discounted price. Listed firms frequently give their shareholders bonuses and rights issues in the form of extra stocks or shares.

Contents:

What Is the Right Share?

A rights share or right issue is when the companies give existing shareholders extra shares at a discounted price and in proportion to their current holdings. The right entitlements (REs) that eligible shareholders will receive in their demat accounts can be utilized to apply for the rights issue or sold on the market. However, the REs will ultimately expire and lose all of their value if they are not sold or used for the rights issue.

The idea behind a rights share is to provide existing shareholders with the “right” to purchase a certain number of additional company shares at a price often lower than the share’s current market value. The shareholder receives these rights in proportion to the shares they currently own in the company. 

For example, if a company provides a rights issue based on “2 for 5,” it indicates that shareholders have the opportunity to acquire two additional shares at the stated reduced price for every five shares that they already own in the company.

The fundamental purposes of a rights share are twofold: the first is to generate capital for the firm, and the second is to provide current shareholders the option to keep their proportional ownership. Both of these goals are primary objectives of a rights share. 

What Is a Bonus Issue?

A bonus issue, also known as a stock dividend, is shares that the companies offer to existing shareholders as a reward for free. Unlike the right issue, which offers shares at a discounted price, the bonus issue doesn’t require shareholders to pay any additional cost. Bonus shares are given to shareholders proportional to their current holdings. Unlike traditional dividends, a bonus issue entails the allocation of new shares, thereby increasing the total number of outstanding shares.

A bonus issue’s primary objective is to share the company’s financial success with its shareholders while maintaining their respective ownership percentages. Bonus issues help companies distribute bonus shares to increase the appeal of their stock to retail investors, offer a cash dividend substitute, and signal that they are in sound financial standing. That is why companies allocate bonus issues from their profits. As a result, shareholders receive a certain number of bonus shares for each share they already own, effectively increasing their overall stake in the company without additional contributions.

Usually, bonus issues are viewed as a way for companies to increase investor confidence and loyalty. By issuing bonus shares, companies may show their dedication to shareholder interests and communicate a positive outlook for future performance. This can increase investor satisfaction and enhance the sense of ownership among shareholders.

Bonus Issue Vs Rights Issue

The primary difference between a bonus issue and a rights issue is that a bonus issue involves the free distribution of additional shares to existing shareholders, whereas a rights issue allows existing shareholders to purchase new shares at a discount. 

Bonus IssueRight Issue
Reward shareholders with free additional sharesRaise capital by offering new shares at a discount
No cost, shares given for freeIncludes the purchase of new shares at a discount
No external capital inflowRaises additional capital for the company
Maintains ownership proportionPotential for ownership dilution if not subscribed
No immediate impact on the stock priceThe stock price may be affected due the discounted price
Relatively simpler processSubject to regulatory approvals and compliance
Does not affect share liquidityAdditional shares may impact liquidity

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

Nrml full form
Trade settlement
Bonus issue vs stock split
Advantages and disadvantages of right issue

Bonus Issue Vs Rights Issue – Quick Summary

  • A bonus issue gives current shareholders free shares, whereas a rights issue lets them buy new shares at a discount to raise capital.
  • A rights share is a way for businesses to raise capital by enabling existing shareholders to purchase new shares at a discount.
  • A bonus issue, also known as a stock dividend, provides existing shareholders with free additional shares.
  • Total investment value remains unchanged in the bonus issue, improving investor sentiment and highlighting the company’s success.

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Difference Between Bonus Issue And Right Issue – FAQs  

What is the difference between shares and rights issues?

Shares represent ownership in a company and are tradable on the stock market, whereas rights issues provide existing shareholders the option to purchase additional shares at a discount to raise capital for the company.

What is the difference between scrip issue and bonus issue?

Scrip issue refers to issuing new shares to shareholders instead of a cash dividend when a company has limited cash but still desires to reward shareholders. On the other hand, bonus issues are distributed to existing shareholders as a reward and for free. That is why the shareholders does not have to pay for those shares.

Are bonus issues good for investors?

Yes, bonus issues can be useful for investors because they increase their shares at no extra cost.

What is the difference between bonus issue and stock split?

Bonus Issue allows a company to issue free additional shares to existing shareholders while maintaining their proportional ownership, whereas in a stock split, existing shares are divided into multiple shares, often to lower the stock price per share, but the total investment value remains unchanged.

Can I sell right issue shares?

Yes, you may sell right-issue shares once they have been listed and become tradable.

Who benefits from bonus shares?

Existing shareholders benefit from bonus shares because they receive free additional shares, increasing their ownership stake. It increases their aggregate shareholding, but there are no immediate monetary benefits.

To understand the topic and get more information, please read the related stock market articles below.

What is Bond Market?
Pledged Shares Meaning
Difference between Fundamental Analysis and Technical Analysis
Difference between FDI and FPI
Difference Between Demat and Trading Account
Delisting Of Shares
etf vs stock
Zinc Mini

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