One of the most evident and practical ways to raise the capital by businesses, companies or individuals, is to invest in shares. True right! Two such among all shares that offer a friendly hand to investors are Bonus & Right shares, however these two differ from each other at various stages. Let’s evaluate the key difference between bonus shares and right shares, that can help to clear confusion between them.
These shares are issued under the command of The Companies Act 2013. Companies use different ways and types to raise funds from the capital market. The other ways used by companies for issuing types of issues or shares to their investors can be through initial public offering (IPOs) and follow on public offer (FPOs).
While getting started with the discussion of the key difference between bonus shares and right shares, first let’s have a short discussion about what these shares are?
What are Bonus Shares?
The shares that are available at no cost. Confused! Let’s clear this confusion out. Bonus shares are the shares that are issued by the companies to their existing shareholders on a particular date at no cost. These shares are issued in addition to their current holding of shares.
However, the bonus issue does not make any change in the net worth of the company, it only increases the total number of shares issued.
These bonus shares are issued in the scenarios where the company doesn’t want to pay out the cash dividend to their shareholders.
Bonus shares is governed under Section 63 of The Companies Act 2013, and according to that the company has the right to use the following accounts or reserve to issue fully paid up bonus shares:
- Capital redemption reserve account
- Securities premium account
- Free reserves
What are Right Shares?
The shares that are offered at the discounted price. Yes, you read it right! Right shares are issued by the companies with the mindset of increasing their subscribed share capital through additional issues.
Right shares are primarily issued to the current shareholders of the company by notifying them by an issue letter or on the other factor that is pro-rata basis, and the shareholders have to respond to that letter in the specific time period mentioned in the letter.
After that the company’s shareholders have the full rights either to accept or reject the company’s proposal. Also there are bare minimum charges and criteria for subscriptions of the share in the case if the shareholder accepts the proposal.
This issuance of shares is governed under Section 62 of the Companies Act of 2013 on a rights basis.
According to Section 62(1)(a), additional shares shall be offered to persons who are the current holders of equity shares of the company on the date of the offer in proportion to the paid-up share capital on those shares.
Now let’s start with the difference between bonus shares and right shares!
Difference between Bonus Shares and Right Shares
Let’s have a look at the difference between both the shares in the below table.
|To lower the share price and as an alternative or the substitute to cash dividend.
|To raise fresh and quick capital for the company.
|Minimum subscription is mandatory.
|Available at no cost.
|The amount is less than the current market price.
|Paid up value
|Requires a fully paid-up value.
|Offers fully or partial paid up value.
|Renunciation & Creation
|The shares are created from the company’s profits, surplus, reserves, and no option is provided to renounce.
|These are the additional shares that are created by the company, and it can be renounced partially or fully.
|Under Section 63 of The Companies Act 2023.
|Under Section 62 OF tHE companies act 2013.
|No payment is required while issuing the card.
|Here subscribers need to pay for the right shares.
|Effect on market price
|The prices are always low based on the issued ratio.
|Till time shareholders don’t sell their shares, the prices of shares may fall or may not.
|These shares are made upon the recommendation of board members, & should be authorized by the members in the general meeting.
|These shares are made on the basis of the authorization of the members via ordinary or special resolution.
|There is no cash flow provided with the bonus shares, only an increase in no. of shares is observed.
|Has an efficient cash inflow when issued as the shareholders pay money to the company to purchase such shares.
|Securities premium, free reserves, capital redemption reserves accounts, these are used to issue the shares.
|Here for issuing, additional shares are created.
From the table of difference between bonus shares and right shares, we can state that both the shares differ from each other at various parameters.
One of the most highlighted differences is that bonus shares are available at no cost which means that companies provide these shares to their shareholders without any long procedures but are available at a certain proportion. While the Right shares are available at a certain price but are lower than the current market price of the share.
Looking at the subscription parameter between the two, Right shares are available to the shareholders but with a minimum subscription, that can be fully or partially. On the other hand Bonus shares don’t require any subscription.
While considering the difference of effect on market price, bonus shares are always lower than the issued ratio of the share according to which the share has been issued. In case of right shares, the price of the shares may or may not fall until the shareholders don’t sell their shares.
Another most distinction parmeter is the authorization of shares. Bonus shares are made upon the recommendation of board members & should be authorized by the members in the general meeting.
While the right shares are made on the basis of the authorization of the members via ordinary or special resolution.
The shares allotted in bonus shares are from their Securities premium, free reserves, capital redemption reserves accounts, while in the right shares scenario, additional shares are created for the issue.
Now let’s look at some of the advantages and disadvantages offered by both the shares!
Advantages & Disadvantages of Bonus Shares
|These shares can result in capital appreciation for shareholders, as it results in the increase in the
|These shares can limit a company’s ability to raise additional funds, as the existing shares are already outstanding.
|These shares are tax-free for shareholders,
as they are not considered as income, &
are available at no cost.
|These shares can be issued as a short-term strategy, instead of focusing on long-term growth and profitability.
|Bonus shares can increase liquidity, as it increases the number of shares available for trading, which can lead to greater liquidity.
|These shares can dilute the control or limit control of existing shareholders, as the number of shares outstanding increases.
|A cost-effective way for the companies to raise additional capital, as it does not require issuing these shares at any additional expense.
|These shares can be unfair to existing shareholders, as they mix up the value of their existing shares without providing any further compensation.
|Bonus shares help to increase the number of
shares outstanding, thus which can lead to an increase in its earnings per share.
|It can be used as a tool for manipulation by the companies or individuals seeking to gain control of a company or influence its share & stock price.
Note: Do you know about the factors on which term deposit and fixed deposit differs? To know more about the difference between them, visit our article Term deposit vs Fixed deposit.
Advantages & Disadvantages of Right Shares
Let’s look at some of the advantages and disadvantages offered by Right shares to its customers.
|These shares are a cost-effective way for the companies to raise capital as they are usually offered at a discounted price, making it purchase at a lower cost on the open market.
|These shares may not be as appealing to new investors as regular or bonus shares. Thus it can limit demand for the right shares.
|These shares can be issued more quickly and at a lower cost than issuing new shares, thus saving a lot of time.
|Due to the minimum subscription feature, if the demand for right shares is lower than the number of shares available, the company may not be able to raise the desired amount of capital.
|More flexibility is offered here in terms of timing and the amount of capital that can be raised quickly as compared to issuing new shares.
|These shares do not offer the voting rights, which means that existing shareholders do not have any additional right or influence in the company’s decision-making process.
|These shares can be used to maintain the company’s capital structure and to ensure the proportion of equity and debt remains balanced.
|Due to its less trading and demand, it limits the participation in the stock market and makes it harder for the shareholders to find buyers or sellers for the shares.
|These shares do not mix up the value of existing shares of shareholders and the proportion of ownership remains unchanged.
|These shares may not be as liquid as other shares, which can make it a harder choice for the shareholders to sell them in the open market space.
Both the shares have their pros and cons which are necessary for the investors to look into before investing in these shares.
As we reach the final stage of this discussion of Key differences between Bonus Shares and Right Shares, both these shares are the mechanism and way through which the companies engage and maintain their good relationship with their shareholders.
Both the shares differ from each other in various aspects like, subscription fee, prices, cash flow, authorization, etc. but provides their utmost features and benefits to its shareholders, and are a good way for both the parties to make investment.
Understanding the above difference between bonus shares and right shares, it becomes pivotal for the investors and shareholders to navigate through the space of stock market.