ACCA F3 Rights issues and Bonus issues of shares
Discussion Topic: Rights Issue vs Bonus Issue Today, we will discuss one of the most confusing and misunderstood topic of the stock market.
Bonus issue and Rights issue both looks very similar to each other, but actually, they are totally different.
An Introduction to Bonus Shares and Rights Shares: When a company holds a large amount of distributable profits but don't want to issueit transforms such profits into shares and distributes those among the shareholders, in a proportion to their existing holdings.
For bonus shares, shareholders are not required to pay any money to the company.
It's just like a free gift.
Contrary to this, when a publicly listed company offers additional shares to their existing shareholders in exchange for money is called rights issue.
This is just like selling shares to existing shareholders at a discounted price to raise funds from the market.
Before going deep into the difference between rights issue vs bonus issue, let us first look into their meanings and descriptions.
What is Bonus Issue of Shares?
Bonus Shares or Bonus issue or shares refers to free shares issued to the existing shareholders of rights issue and bonus issues company, in a proportion to the number of rights issue and bonus issues held by the shareholder.
For example, if a company declares 1:2 bonus issue, then it means all the existing shareholders will get one additional share for every 2 shares they hold.
Bonus Shares are distributed as an alternative to paying cash dividends.
Shareholders are allowed to sell these bonus shares to meet their income needs.
The bonus issue of shares only increases the total number of outstanding shares, but it does not change the company's net worth.
Though the bonus issue increases the total number of shares issued by the company, the ratio of shares owned by the shareholder remains same.
Bonus shares do not inject fresh working capital into the company, as they are distributed among the shareholders without any consideration.
The above statements may sound similar to thebut they are different in many ways.
Issuing bonus shares is an option for the companies to increase short-term liquidity.
This can be thought of as an indirect solution for cash limitations since it prevents the outflow of money in the form of dividends while increase short-term liquidity of stocks.
To learn more about bonus issue, check our guide on.
What is Rights Issue of Shares?
Right shares or rights issue of shares are fresh shares which are offered by the company to the existing shareholders, with read article aim to raise more capital from the market.
The right shares are primarily offered to the current equity shareholders at a discounted price.
The shareholders are then required to inform the company about the quantity of shares they want to buy.
The shareholders have the option to either subscribe in full, or subscribe partially, or they can sell the rights to someone else, or even they can completely ignore the rights issue.
To learn more about bonus issue, check our guide on.
Key Differences Between Rights Issue and Bonus issue: Bonus shares refers to the shares that are issued to current shareholders, out of free reserves created from genuine profits.
On the other hand, the company offers right shares to the existing shareholders to raise additional capital from the market as a limited time offer.
Bonus shares are given to the shareholders free of cost, while right shares are offered to the shareholders at a discounted price.
The primary objective of the right issue is to fetch additional capital to the firm.
Whereas, the bonus issue aims to increase the liquidity by increasing the number of outstanding shares.
The facility of the defection of rights is available for the right shares, in which the shareholders can give up their rights.
However, no such option is available in case of bonus issue.
Bonus shares are always fully paid up, whereas right shares can be either fully paid up or partly paid up.
To rights issue and bonus issues the benefits of the rights issue, a minimum subscription rights issue and bonus issues mandatory, while no such subscription is required in case of bonus issue.
BASIS FOR COMPARISON RIGHTS ISSUE BONUS ISSUE Meaning Right shares are offered to the existing shareholders in a proportion to their existing holdings.
Rights can be bought at a discounted price, within a stipulated time period.
Bonus shares are shares issued by the company to their existing shareholders for free.
It is issued in the proportion of their existing holdings.
Objective To raise fresh capital from the market.
Issued as an alternative to dividend payment.
Also used to bring down the share price.
Price Offered at a discounted price.
Issued free of cost Renunciation Shareholders may fully or partly renounce their rights.
No such options Minimum subscription Required if you want to buy rights shares.
Not Required Paid up value Can be either fully or partly paid up.
Always fully paid up.
Cash Receipt Results in cash receipt for the company Does not result in cash receipt.
Share Price Does not affect the share price.
Bring down the share price according to the proportion.
Rights Shares vs Bonus Shares: Final Thoughts Companies consider the issue of rights shares when they are in a need for more cash, whereas bonus shares are issued as an alternative to dividend to restrict cash outflow.
Both rights shares and bonus shares rights issue and bonus issues the number of outstanding shares, thus increases the liquidity.
These days we do not notice companies issuing rights shares or bonus shares to shareholders.
Moreover, in many cases, companies prefer to split stocks instead of issuing bonus shares.
We hope that you have enjoyed the above article describing the Rights Issue vs Bonus Issue of shares.
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Post navigation Theoretically, the rights issue somewhat dilutes shareholdings but only for those who rejects to take the benefit of rights issue.
Accounts : Issue of Bonus Shares
One particular area I found myself tripping up on was the difference between a rights issues and bonus issues of shares. Here is a run down on the difference between the two. Bonus Issue of Shares. A bonus issue of shares (also known as a script issue) is quite simply an issue of ordinary shares to existing shareholders at no additional cost.
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