Key differences between Right Shares and Bonus Shares

Right Shares

Right Shares are additional shares issued by a company to its existing shareholders at a discounted price, offering them a proportional right to buy more shares before the company offers them to the public. This is a way for companies to raise additional capital while giving current shareholders the opportunity to maintain their ownership percentage. The number of shares offered is based on the shareholder’s current holding. Right shares are often issued to finance expansion, repay debt, or improve the company’s capital structure. Shareholders can accept, reject, or sell their rights to another investor in the secondary market.

Characteristics of Right Shares:

• Exclusive to Existing Shareholders:

Right shares are offered exclusively to existing shareholders, granting them the first opportunity to purchase additional shares before the public. This maintains their proportionate ownership in the company.

• Discounted Price:

Right shares are typically issued at a price lower than the prevailing market price, making them an attractive investment option for shareholders and encouraging their participation.

• Time-Bound Offer:

The right to subscribe to the shares is available for a limited period, as specified by the company. Shareholders must act within this timeframe to exercise their rights.

• Proportional Allotment:

The shares are offered in a proportionate manner, based on the number of shares already held by the shareholders. For example, a 1:5 rights issue means one additional share for every five shares held.

• Fundraising Objective:

Right shares are primarily issued to raise additional capital for specific purposes, such as business expansion, debt reduction, or funding new projects.

• Non-Mandatory Acceptance:

Shareholders are not obligated to subscribe to the right shares. They can choose to renounce their rights, allowing other investors to purchase them in the market.

• Renounceable Option:

Shareholders who do not wish to subscribe can sell or transfer their rights entitlement to another party, enabling them to monetize their rights without subscribing.

• No Change in Ownership:

Issuing right shares does not dilute the ownership structure of the company, as only existing shareholders are involved. It helps preserve shareholder control and confidence.

Bonus Shares

Bonus Shares are additional shares issued by a company to its existing shareholders without any cost, based on the number of shares they already hold. These are distributed from the company’s accumulated reserves or surplus profits, serving as a reward for shareholders. Bonus shares increase the number of shares held by shareholders but do not affect their total investment value, as the market adjusts the share price accordingly. Issuing bonus shares enhances shareholder confidence, improves liquidity in the market, and signals the company’s strong financial health. However, it does not bring additional capital into the company.

Characteristics of Bonus Shares:

• Issued Free of Cost:

Bonus shares are issued to existing shareholders without any monetary payment. They are a reward for shareholders, reflecting the company’s profitability and commitment to share its success.

• Proportional Distribution:

Bonus shares are distributed in a predetermined ratio based on the number of shares already held by shareholders. For instance, a 1:3 bonus issue means shareholders receive one additional share for every three shares they own.

• No Cash Outflow for Shareholders:

Since bonus shares are issued from the company’s reserves, shareholders do not need to invest additional funds. This makes it a convenient method for shareholders to increase their holdings.

• Capitalization of Reserves:

Bonus shares are issued by converting a portion of the company’s reserves, such as retained earnings or share premium, into equity capital. This reduces the reserves while increasing the paid-up share capital.

• Enhances Share Liquidity:

The issue of bonus shares increases the total number of shares in the market, potentially improving liquidity. This can make the company’s shares more affordable and attractive to investors.

• No Change in Shareholder Proportion:

Bonus shares do not alter the proportionate ownership of shareholders. Each shareholder’s percentage of ownership in the company remains unchanged despite the increase in the number of shares.

• Impact on Market Price:

The issuance of bonus shares usually reduces the market price per share proportionally, as the total value of the shares remains constant. This makes the stock more accessible to retail investors.

• Sign of Financial Health:

The decision to issue bonus shares reflects the company’s strong financial position and confidence in its future earnings. It is often viewed as a positive signal by the market.

Key differences between Right Shares and Bonus Shares