Difference between Bonus Issue And Right Issue
Mridula Sharma12 Dec, 2024
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Companies use different financial strategies to connect with their shareholders and raise capital. Two common methods are the Bonus Issue and the Right Issue. Both involve issuing extra shares but have different objectives and effects on the company and its shareholders. Investors need to understand the differences between Bonus Issues and Right issues to make informed choices for CA exams .
What Is Bonus Issue?
A Bonus Issue is a way for companies to reward their shareholders by offering them additional shares at no cost. Instead of paying cash dividends, a company uses its profits or reserves to create more shares and distribute them to existing shareholders. Shareholders receive extra shares based on the number they already own, but the total value of their investment remains unchanged because the overall number of shares increases. This method helps companies promote long-term investment without using cash.What Is Right Issue?
A Rights Issue is a method used by companies to raise additional capital by offering new shares to their existing shareholders. Shareholders are given the "right" to buy these new shares, typically at a discounted price compared to the current market value, in proportion to the shares they already own. This gives shareholders the opportunity to increase their investment in the company before shares are made available to the public. It’s a way for companies to raise funds while offering loyal shareholders the chance to expand their holdings at a lower price.Also Check: Elements of Financial Statements
Bonus Issue and Right Issue Comparison
The table below highlights the key differences between a Bonus Issue and a Rights Issue, providing a clear comparison of their features and impact on shareholders.| Difference Between Bonus Issue and Right Issue | ||
|---|---|---|
| Factor | Bonus Issue | Rights Issue |
| Definition | Free distribution of additional shares to existing shareholders. | Offer to buy additional shares at a discounted price. |
| Cost to Shareholder | No cost for shareholders. | Shareholders must pay for the new shares. |
| Purpose | To reward shareholders and capitalize reserves. | To raise additional capital for the company. |
| Effect on Shareholder's Equity | No change in equity. | Shareholder equity increases if new shares are purchased. |
| Effect on Share Price | Likely to decrease due to an increase in the number of shares. | May have a small impact, as shares are offered at a discounted price. |
| Dilution of Ownership | No dilution of ownership. | Possible dilution if some shareholders do not buy new shares. |
| Eligibility | Automatic for all existing shareholders. | Optional, shareholders must decide whether to purchase new shares. |
Difference Between Bonus Issue and Right Issue
When it comes to issuing additional shares, companies can choose in between Bonus Issue and Right Issue. Though both involve giving out more shares to existing shareholders, Bonus Issue and Right Issue have key differences that affect shareholders in different ways.Definition : A Bonus Issue involves distributing extra shares to current shareholders for free, while a Rights Issue gives shareholders the option to buy more shares at a discounted price.
Cost to Shareholders : Shareholders incur no cost for a Bonus Issue, but a Rights Issue requires them to pay for the additional shares they buy.
Purpose : The goal of a Bonus Issue is to reward existing shareholders and use up company reserves, while a Rights Issue is designed to raise extra funds for the company.
Shareholder's Equity : Shareholder equity remains the same in a Bonus Issue, but it increases in a Rights Issue as shareholders buy new shares.
Effect on Share Price : A Bonus Issue may lower the share price because of the higher number of shares, whereas a Rights Issue typically has less impact on the price due to the discount offered.
Dilution of Ownership : A bonus Issue does not dilute ownership, but a Rights Issue can lead to dilution if some shareholders don’t buy the new shares.
Eligibility : All shareholders automatically receive shares in a Bonus Issue, while in a Rights Issue, shareholders must decide whether to purchase additional shares.
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What is a Bonus Issue?
What is a Rights Issue?
How does a Bonus Issue affect share price?
Is there any cost involved in a Rights Issue?
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