Are you a shareholder who often finds yourself confused when it comes to the right shares and bonus shares? Fear not, for we have created the ultimate guide that will unravel the mysteries surrounding these two crucial concepts.
Right shares refer to additional shares issued by a company to existing shareholders in proportion to their current holdings. While bonus shares, also known as scrip dividends or capitalization issues, are additional shares issued to existing shareholders at no cost.
Right vs. Bonus Shares
| Right Shares | Bonus Shares |
|---|---|
| Right shares are additional shares offered to existing shareholders in proportion to their existing shareholding, allowing them the right to subscribe and purchase the new shares at a predetermined price. | Bonus shares, also known as scrip dividends, are additional shares issued to existing shareholders without any cost, as a form of reward or distribution of profits by the company. |
| They are issued to raise additional capital for the company, providing an opportunity for existing shareholders to maintain their ownership percentage and participate in the company’s growth. | They are issued to reward shareholders by increasing the number of shares they hold, without requiring any cash outflow, as a way to enhance shareholder value. |
| Right shares require shareholders to pay a predetermined subscription price per share to acquire the new shares, usually at a discounted rate compared to the prevailing market price. | Bonus shares do not require any payment from shareholders as they are issued for free, and the shareholders receive additional shares in proportion to their existing holdings. |
| They may lead to dilution of ownership as new shares are issued, potentially reducing the percentage ownership of existing shareholders who do not exercise their rights to subscribe. | They do not result in dilution as the proportionate increase in the number of shares is given to existing shareholders without altering their ownership percentage. |
| Right shares may have a temporary impact on the stock price, as the discounted subscription price could lower the market value per share until the rights issue is fully subscribed. | Bonus shares generally do not have a significant impact on the stock price, as the increase in the number of shares is offset by the increase in the company’s overall net worth. |
| They provide existing shareholders with the option to exercise their rights to subscribe for additional shares, allowing them to control their level of investment and exposure to the company. | They are automatically allotted to existing shareholders, and they do not have the choice to decline or opt-out of receiving the additional shares. |
What are Right Shares?
Right shares, also known as rights issues or equity offerings, are additional shares offered by a company to its existing shareholders. The company provides existing shareholders with the right to purchase these new shares at a predetermined price, typically below the current market price.
Shareholders have the option to exercise their rights and subscribe to the new shares in proportion to their existing shareholding. Right shares enable companies to raise additional capital while giving existing shareholders the opportunity to maintain their ownership percentage by subscribing to the new shares.
What are Bonus Shares?
Bonus shares, also known as stock dividends or scrip dividends, are additional shares distributed by a company to its existing shareholders at no cost. Instead of paying dividends in cash, the company issues bonus shares to shareholders as a way to utilize accumulated earnings or capital reserves.
The distribution of bonus shares increases the total number of outstanding shares, but it does not affect the proportional ownership of individual shareholders. Bonus shares are seen as a way to reward shareholders and can potentially enhance the liquidity and marketability of the company’s stock.
Advantages and disadvantages of Right Shares
Advantages of Right Shares:
- -You retain your original shareholding in the company
- -Right shares are often offered at a discount to the current market price
- -You have the opportunity to increase your stake in the company
- -Rights shares typically have a lower risk than bonus shares
Disadvantages of Right Shares:
- -If the rights share issue is not fully subscribed, you may be left with unwanted shares
- -The value of your rights shares may be diluted if the rights issue is oversubscribed
- -You may have to pay brokerage fees to exercise your rights
Advantages and disadvantages of Bonus Shares
Advantages of Bonus Shares:
- Utilizes retained earnings without depleting cash reserves.
- Rewards shareholders with additional shares at no cost.
- Potentially enhances the liquidity and marketability of the company’s stock.
- This can lead to potential price appreciation.
Disadvantages of Bonus Shares:
- Dilutes ownership percentage of existing shareholders.
- Reduces earnings per share (EPS) without a corresponding increase in earnings.
- Some investors prefer cash dividends over bonus shares.
- Involves administrative complexities and potential costs for the company.
Regulatory framework for Right and Bonus Share issues
- The minimum subscription size for public issues should be Rs. 1 lakh.
- The minimum number of allottees in a public offer should be 50.
- An advertisement for a public offer should contain details such as the name, address, and telephone number of the designated stock exchange where the share application forms will be available, the date(s) from which forms will be accepted, etc.
- A draft letter of offer (LoF) containing all material information with respect to the rights issue/bonus issue shall be filed with SEBI at least 21 days prior to filing the red herring prospectus (RHP).
- The RHP shall be filed with SEBI and the Registrar of Companies (RoC) not less than 15 days prior to the opening of the rights/bonus issue.
- The final LoF shall be dispatched/uploaded on the website not less
Key differences between Right and Bonus Share Issues
Right Share Issues:
- Purpose: Right share issues are undertaken to raise additional capital for the company.
- Pricing: Right shares are offered to existing shareholders at a predetermined price, typically below the market price.
- Subscription: Existing shareholders have the right to subscribe to the new shares in proportion to their existing shareholding.
Bonus Share Issues:
- Purpose: Bonus share issues are undertaken to reward shareholders by distributing accumulated earnings or capital reserves.
- Pricing: Bonus shares are issued to existing shareholders at no cost.
- Subscription: Shareholders do not need to subscribe or pay for bonus shares; they are allocated automatically based on existing shareholding.
- Difference between sale and hire purchase
- Difference between bill discounting and factoring
- Difference between Bull and Bear Market
Conclusion
Right shares are issued to raise additional capital, offering existing shareholders the opportunity to purchase new shares at a predetermined price. This helps the company generate capital while maintaining proportional ownership for shareholders. While bonus shares are distributed to reward existing shareholders, utilizing accumulated earnings or reserves without requiring additional payment. Bonus shares do not impact ownership percentages but provide a tangible benefit to shareholders.
