Share capital is the most popular and convenient source of long term finance for companies. The organisations utilise multiple types of issues to raise public funds from the capital market. The IPOs and FPOs are one of those issues through which a company issue (sell-off) financial securities like equity shares for the investors to subscribe. The right issue and bonus issue are other types of issues which the companies utilise to raise capital and as cash alternatives in different circumstances.
In this article, you will understand what does it mean by bonus shares and right shares and how they are different from each other.
Bonus Shares and Right Shares:
The Right Shares refers to those issues of shares which a company offers to their existing shareholders at a discounted price. The company’s shareholders have rights to accept or reject the proposal and also there are minimum criteria for subscriptions of the share if the shareholder accepts the proposal. Such issuance of shares is called Right issues and such share is known as Right Shares.
The company notifies to each shareholder regarding the issuance of the right share. The shareholders have to respond the notice within a stipulated time period, however, they have the option to either subscribe fully or partially or avoid or can sell the offer as well in the market.
On the other hand, bonus shares refer to the shares which are issued free of cost to their shareholders on a specified date by the companies. The bonus shares are issued at a certain proportion (eg. 1:1 or 2:1 or 3:1) according to the shareholders’ stake in the company.
The bonus shares are issued when the companies don’t want to disburse cash dividend to their shareholders, in such scenario, they issue bonus share to handle liquidity crunch of their shareholders. The bonus shares can also be issued if a company requires to decrease its share price in the market to make shares affordable to small investors.
The bonus shares can also be issued in case of surplus reserves and the intention of the company is to expand its operations. Due to the bonus issue, the share price of the company reduces and being affordable the demand of shares increases and thus the price of the share is also appreciated.
Bonus Shares vs Right Shares (Comparison Table):
|BASIS OF COMPARISON||RIGHT SHARES|| BONUS SHARES
|Meaning||Right shares are issued on discounted price to the existing shareholders and they have option to agree or deny the offer.||Bonus shares are issued free of cost to the shareholders in a certain ratio, other than a dividend.
|Prices||Less than the current market price||Free of cost
|Purpose||To raise quick and additional funds||To bring share price down and as an alternative to cash dividend.
|Subscription||Minimum subscription is mandatory||Not required
|Paid-up Value||Fully or partially paid-up.||Always fully paid-up
|Effect on Market Share Price||May or mayn't decrease unless the shareholders sell off the shares. ||Always reduce based on issued ratio.
|Creation & Renunciation||These are additional shares created by the company and can be renounced partially or fully.||These shares are created from the company's profits, reserves & surplus and such renunciation option is not available.
Difference between Bonus Shares and Right Shares:
Although both right shares and bonus shares are issued to the company’s existing shareholders, yet there is some key difference between right shares and bonus shares. We can differentiate bonus shares and right shares based on the following aspects.
As we discuss above right shares which are issued to the shareholders at discount over current market price, however, bonus share is issued free of cost at a certain ratio to the company’s shareholders.
The right shares are issued at a discounted price, on the other hand, bonus shares are issued free of cost (as a reward).
The right shares are issued with an intention to raise additional and quick funds for the company whereas the objective of issuing bonus share is to decrease the share price to make it affordable.
In case of right shares, the shareholders have to subscribe a minimum number of shares if agree otherwise they can refuse the company’s proposal, on the other hand, there are no such criteria in bonus shares.
5) Paid-up Capital:
The right shares may be either fully paid up or partially paid up, however, bonus shares are always fully paid up.
6) Effect on Market Share Price:
The share price of the issuing company may or may not decrease in case of right issues provided the shareholders should not sell off their rights in the open market whereas bonus issue always reduces the share price according to which proportion it is issued.
7) Creation & Renunciation:
The right shares are extra shares formulated by the company in order to raise quick and additional funding. The shareholders possess the rights whether to renounce partially or fully while bonus shares are created from the company’s net profits or reserves and surplus. Moreover, there is no such renunciation option available for in case of bonus issues.
In a nutshell, the difference between right shares and bonus shares can be concluded as the right share is issued at a lower price than the current market share price whereas bonus share is issued as a reward to the shareholders of the company on a specified date ie. the shareholders must have the company’s equity shares into their Demat account on that specific date.
Difference between IPO and FPO
Difference between Primary and Secondary Market
Money Market vs Capital Market
Equity shares vs Preference shares
References: Key difference (source)