Rights Issue vs Bonus Issue—What’s Better for Investors

Listed companies may issue additional shares to existing shareholders through a rights or bonus issue. These corporate actions serve different purposes—one raises fresh capital, while the other distributes accumulated reserves. The key difference between right issue and bonus issue lies in how shareholders receive these shares. A rights issue offers new shares at a discounted price, requiring payment. A bonus issue, in contrast, allocates shares free of cost based on existing holdings.

This article outlines how both mechanisms work and what they mean for investors.

What is a rights issue of shares?

A rights issue (or rights offering) is a way for a company to raise capital by offering its existing shareholders the opportunity to purchase additional shares. These new shares are usually offered at a lower price than the current market rate and in proportion to the number of shares the investor already owns. This gives loyal shareholders a chance to increase their ownership in the company at a special rate before the shares are offered to the public.

Companies use rights issue of shares to raise funds for business expansion, debt repayment, or new projects. Offering shares at a discount encourages participation and helps minimise the impact of ownership dilution.

What is a bonus issue of shares?

A bonus issue, also called a stock dividend, is when a company gives additional shares to existing shareholders for free as a reward. Unlike a rights issue, where shareholders must pay to acquire new shares, a bonus issue comes at no cost to the shareholder. The bonus shares are issued in a specific ratio, such as one bonus share for every five shares already held.

Rather than distributing profits as cash dividends, the company uses its retained earnings to issue these bonus shares. This increases the total number of shares in circulation, but each shareholder’s ownership percentage remains unchanged.

Bonus issue helps make the stock more attractive to small investors. It acts as an alternative to cash dividends and shows that the company is financially healthy. Shareholders benefit by getting more shares without spending any extra money. This can increase their overall shareholding and strengthen their trust in the company.

Why do companies offer rights issue or bonus issue of shares?

Both rights issue and bonus issue of shares serve strategic purposes. Companies offer a rights or bonus issue to raise money or reward their shareholders. A rights issue is a way for a company to raise funds by allowing its current shareholders to buy more shares at a lower price than the market. It is like giving loyal shareholders a special deal before opening it up to anyone else. The money raised can be used to expand the business or pay off debt.

On the other hand, a bonus issue is a way for companies to thank shareholders by giving them free shares, usually to make the stock more affordable or to increase liquidity in the market. Both methods help improve the company’s financial position while keeping investors happy.

Here’s an example:

Let’s say ABC Limited wants to reward its shareholders. It may choose a bonus issue, granting them free shares in proportion to what they already own without any cost.

Alternatively, if the company needs to raise funds, it may go for a rights issue, offering shareholders the chance to buy new shares at a discounted price. This helps the company secure additional funds while allowing investors to increase their stake.

Rights issue vs bonus issue: Which is better for investors?

The better option depends on what you want as an investor. The following are a few points to consider:

The rights issue is better if:

• You want to buy more shares at a cheaper price
• You believe the company will grow in the future
• You can afford to invest more and want to keep your ownership level

The bonus issue is better if:

• You want free extra shares
• You plan to hold the stock for a long time
• You don’t want to spend more money but still benefit

Conclusion

So, which is better—a rights issue or a bonus issue? There’s no one-size-fits-all answer. In the rights issue vs bonus issue debate, your choice depends on your investment priorities. A bonus issue might be the right pick if you prefer being rewarded without spending extra. However, a ri\ghts issue can be a smart move if you believe in the company’s future and are willing to invest more to strengthen your holdings. Ultimately, your decision should align with your financial goals, risk appetite and investment capacity.

Sources

Alice Blue
Shiksha Online
Choice India