Under the Companies Act, 2013, both Rights Issue and Bonus Issue are ways companies reward existing shareholders, but with different approaches. A Rights Issue allows shareholders to purchase additional shares at a discounted price, often used by companies needing fresh capital. It’s a chance to buy more shares but requires investment. On the other hand, a Bonus Issue offers free shares by converting company reserves into equity, rewarding shareholders without any financial outlay. While a rights issue is for raising funds, a bonus issue enhances shareholder value without diluting ownership.

Main Difference Between Rights Issue and Bonus Issue under the Companies Act, 2013

When companies need to reward shareholders or raise capital, they can choose between a Rights Issue and a Bonus Issue. Both options are beneficial to shareholders but serve different purposes.

Rights Issue is like an exclusive sale for existing shareholders. The company offers them the opportunity to buy additional shares at a discounted price, proportional to their current holdings. This is a great way for companies to raise new capital without going to the public, while giving shareholders the first shot at purchasing more equity. Imagine you have 10 shares, and the company says, “Hey, you can buy 2 more at a lower price than the market.” You pay, and in return, you increase your ownership in the company.

Rights Issue and Bonus Issue

On the other hand, a Bonus Issue is more like a thank-you gift from the company. Instead of raising funds, the company simply issues additional shares for free to its existing shareholders, in proportion to their holdings, by utilizing its reserves. For example, if you own 10 shares and the company declares a 1:1 bonus issue, you’ll get 10 more shares for free. It’s a way for the company to distribute its accumulated profits without cash outflow.

In simple terms, Rights Issue requires you to invest more money, while Bonus Issue rewards you with additional shares for your loyalty, absolutely free!

Table-Wise Difference Between Rights Issue and Bonus Issue

When a company wants to raise capital or reward its shareholders, it can use various methods, including Rights Issue and Bonus Issue. Both approaches involve issuing new shares, but they serve different purposes and have distinct features. Here’s a practical, engaging comparison of the two methods under the Companies Act, 2013.

Simplified Example

Rights Issue: Imagine a company, XYZ Ltd., needs funds for a new project. It offers its existing shareholders the chance to buy additional shares at a lower price than the current market rate. Shareholders can decide whether to buy these shares and pay the discounted price, providing the company with the needed capital.

Bonus Issue: Now, consider XYZ Ltd. has excess reserves and wants to reward its shareholders. Instead of paying cash dividends, it issues bonus shares. If you own 10 shares, you might get 5 additional shares for free, increasing your total shares to 15. This is done using the company’s retained earnings and does not involve any additional investment from shareholders.

Key Takeaways

• Rights Issue: A method to raise new capital by offering shares at a discount to existing shareholders. It requires payment from shareholders and affects the company’s share price due to the increase in shares.
• Bonus Issue: A way to distribute the company’s reserves among shareholders by issuing additional shares for free. It rewards shareholders and adjusts the share price but does not raise new capital.

Understanding these distinctions helps shareholders and companies make informed decisions about capital raising and reward strategies, balancing financial needs with shareholder value.

What is a Rights Issue?

A Rights Issue is a corporate finance tool used by companies to raise additional capital by offering new shares to existing shareholders. The offering is made at a discounted price compared to the current market price, which incentivizes shareholders to purchase more shares. This approach allows companies to secure funding for various needs, such as expansion, debt reduction, or working capital, while giving existing shareholders the opportunity to increase their investment in the company.

Key Aspects of a Rights Issue

1. Definition and Purpose
   • A Rights Issue involves issuing new shares to existing shareholders at a set price, often lower than the current market price. The primary purpose is to raise capital without borrowing or issuing shares to the public.
2. Eligibility and Allocation
   • Only existing shareholders on the record date are eligible to participate. The allocation is typically proportional to the number of shares already held by each shareholder. For example, if a company offers 1 new share for every 5 shares held, a shareholder with 100 shares would be entitled to buy 20 additional shares.
3. Pricing
   • The new shares are offered at a discounted rate compared to the market price. This discount encourages shareholders to buy additional shares. The discount helps offset the dilution effect and provides a financial incentive.
4. Subscription Period
   • The rights issue is open for a fixed period, typically 15 to 30 days, during which shareholders can subscribe to the new shares. The exact period is announced by the company and is specified in the Rights Issue Offer Letter.
5. Proportional Rights
   • The offer is made in proportion to the existing shareholding, ensuring that shareholders can maintain their proportional ownership if they choose to exercise their rights.
6. Regulatory Compliance
   • A Rights Issue must comply with various regulations and guidelines under the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations. This includes filing necessary documents with the Registrar of Companies (ROC) and adhering to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).

SEBI LODR Process for Rights Issue

1. Approval and Announcement
   • The company must obtain approval from its board of directors and, if applicable, from the shareholders through a special resolution. After approval, the company must announce the rights issue, including the issue price, record date, and subscription period.
2. Offer Document
   • The company is required to prepare and file a detailed offer document with SEBI. This document, known as the Letter of Offer, includes information about the company, its financials, the purpose of the issue, terms of the rights issue, and instructions for subscription.
3. Application and Allotment
   • Shareholders interested in participating must submit an application within the subscription period. The company processes these applications and allots the new shares based on the number of shares subscribed and the rights available.
4. Listing and Trading
   • Once the new shares are allotted, they are listed on the stock exchange. The company’s share price may adjust based on the additional shares issued, and shareholders can trade the new shares as they would with existing shares.
5. Compliance and Reporting
   • The company must comply with SEBI regulations throughout the process, including filing necessary forms and reports. The company must also update its shareholders and the stock exchange on the outcome of the rights issue.

Sale and Purchase of Rights

1. Sale of Rights
   • Shareholders who do not wish to exercise their rights can sell them on the stock exchange if the company has allowed trading of rights. This is known as the renunciation of rights. The right to buy shares at a discounted price can be valuable, and shareholders may choose to sell these rights to others who want to participate in the issue.
2. Purchase of Rights
   • Investors who were not existing shareholders but are interested in acquiring shares at the discounted price can purchase the rights from existing shareholders. This is often done through a secondary market where the rights are traded. The purchase of rights provides an opportunity to buy shares at a lower price without waiting for a public offering.

Hidden Facts and Considerations

1. Dilution Effect
   • While a rights issue raises capital, it dilutes the ownership percentage of existing shareholders who do not participate. This dilution effect can impact voting power and influence over the company.
2. Impact on Share Price
   • The share price typically adjusts downward after the rights issue is announced due to the increased number of shares. This adjustment reflects the discounted price at which new shares are issued and the potential dilution.
3. Underwriting
   • In some cases, a rights issue may be underwritten by financial institutions or investors. Underwriting ensures that the company raises the desired amount of capital, even if some existing shareholders do not subscribe to the issue.
4. Regulatory Scrutiny
   • SEBI closely monitors rights issues to ensure fairness and transparency. Companies must adhere to strict disclosure requirements and ensure that the process is conducted in compliance with all regulations.
5. Strategic Use
   • Companies often use rights issues as a strategic tool to strengthen their financial position, fund growth initiatives, or address specific financial needs. The decision to conduct a rights issue is typically based on the company’s strategic goals and financial health.

In summary, a Rights Issue is a crucial mechanism for companies to raise capital while providing existing shareholders the opportunity to increase their investment. It involves detailed regulatory processes, pricing strategies, and potential market impacts, making it an important aspect of corporate finance.

What is a Bonus Issue?

A Bonus Issue refers to the distribution of additional shares to existing shareholders, free of cost, based on the shares they already hold. This process involves converting the company’s reserves or surplus profits into equity shares. A bonus issue does not raise new capital but is a way to reward shareholders by utilizing the company’s retained earnings or reserves. Here’s a detailed explanation of all aspects of the bonus issue, including SEBI LODR regulations and related processes.

Key Aspects of Bonus Issue

1. Definition and Purpose:
   • A bonus issue is a corporate action where a company issues additional shares to its existing shareholders without any cost. This is typically done to reward shareholders, adjust the share price to a more marketable level, and reflect the company’s profitability.
2. Mechanism:
   • Source of Funds: Bonus shares are issued from the company’s accumulated reserves, such as retained earnings or general reserves. This process involves capitalizing these reserves, thereby increasing the company’s share capital without any new cash inflow.
   • Issue Ratio: The ratio of bonus shares to existing shares is determined by the company’s board of directors and is usually expressed as a fraction (e.g., 1:2 or 1:3), indicating that one new share is issued for every two or three shares held.
3. Regulatory Framework:
   • Companies Act, 2013: Under Section 63, the Companies Act provides the legal framework for issuing bonus shares. Companies must follow specific procedures, including obtaining board approval and shareholder consent, and filing necessary documents with the Registrar of Companies (ROC).
   • SEBI LODR Regulations: The Securities and Exchange Board of India (SEBI) regulates bonus issues through the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015. Key requirements include:
     • Board Resolution: The board of directors must pass a resolution approving the bonus issue.
     • Shareholder Approval: A special resolution must be passed by shareholders in a general meeting.
     • Disclosure Requirements: Companies must disclose the bonus issue details in their financial statements and notify the stock exchanges where their shares are listed. The disclosure should include the ratio of the bonus issue, the amount capitalized, and the effect on share capital.
4. Impact on Shareholders and Share Price:
   • Shareholders: Shareholders receive additional shares in proportion to their existing holdings, increasing their total number of shares. However, the overall value of their investment remains the same since no new capital is raised.
   • Share Price: Post-bonus issue, the share price generally adjusts downward to reflect the increased number of shares in circulation. This adjustment is often proportional to the bonus ratio.
5. Process:
   • Announcement: The company announces the bonus issue, including the ratio and date of issuance.
   • Record Date: A record date is set to determine which shareholders are eligible to receive the bonus shares.
   • Allotment: Bonus shares are allotted to eligible shareholders, and the company updates its records to reflect the new holdings.
6. Hidden Facts:
   • Dilution of Earnings: Although bonus issues increase the number of shares, they do not dilute earnings per share (EPS) in the short term because the company’s profits are not affected. However, EPS may appear lower in the future due to the increased number of shares.
   • Market Perception: A bonus issue is often seen as a positive signal, indicating the company’s good financial health and profitability. It can boost investor confidence and potentially increase demand for the stock.
7. Sale/Purchase of Rights:
   • Rights Issue: In contrast to a bonus issue, a rights issue involves issuing new shares to existing shareholders at a discounted price. Shareholders can buy additional shares, and the proceeds from the sale are used to raise capital.
   • Sale/Purchase of Rights: If a shareholder does not wish to subscribe to the rights issue, they can sell their rights to other investors. This process allows investors who may not want to purchase more shares to monetize their rights, while others can buy additional shares at a discount.

Pointwise Difference Between Rights Issue and Bonus Issue

1. Definition:
   • Rights Issue: An offer to existing shareholders to purchase additional shares at a discounted price to raise new capital for the company.
   • Bonus Issue: Issuance of additional shares to existing shareholders for free, using the company’s reserves or surplus profits, without raising new capital.
2. Purpose:
   • Rights Issue: To raise fresh capital for the company, which can be used for expansion, debt reduction, or other corporate needs.
   • Bonus Issue: To reward shareholders and utilize the company’s retained earnings or reserves, usually to adjust the share price and distribute profits without cash outflow.
3. Payment:
   • Rights Issue: Shareholders are required to pay a discounted price for the new shares they buy.
   • Bonus Issue: Shareholders receive additional shares at no cost, as the shares are issued from the company’s reserves.
4. Pricing:
   • Rights Issue: The price of the new shares is set at a discount to the current market price to encourage participation.
   • Bonus Issue: No pricing involved as the shares are issued free of charge, and their value is derived from the company’s reserves.
5. Impact on Shareholders:
   • Rights Issue: Shareholders have the option to buy more shares, which increases their investment if they choose to participate.
   • Bonus Issue: Shareholders receive additional shares in proportion to their existing holdings, increasing their share count without requiring further investment.
6. Share Capital:
   • Rights Issue: Increases the company’s share capital as new shares are issued and paid for by shareholders.
   • Bonus Issue: Increases share capital by converting reserves into equity shares, but no new funds are injected into the company.
7. Regulatory Requirements:
   • Rights Issue: Requires detailed documentation, including an offer letter, board approval, and compliance with SEBI guidelines and ROC filings.
   • Bonus Issue: Requires board and shareholder approval, with compliance to SEBI regulations and disclosure of the bonus issue details in financial statements.
8. Share Price Impact:
   • Rights Issue: Typically causes the share price to adjust downward to reflect the increase in the number of shares and the discounted issue price.
   • Bonus Issue: Usually leads to a downward adjustment in the share price to reflect the increased number of shares, but this adjustment is proportional to the bonus ratio.
9. Process:
   • Rights Issue: Involves issuing an offer to existing shareholders, who must pay the discounted price to acquire new shares.
   • Bonus Issue: Involves issuing new shares free of cost based on a pre-determined ratio, with no cash transaction involved.
10. Example:
    • Rights Issue: A company offers 1 new share for every 2 shares held at a 20% discount to the market price.
    • Bonus Issue: A company issues 1 additional share for every 5 shares held, utilizing its reserves.

Understanding these differences helps in recognizing the strategic financial decisions companies make and how these decisions affect shareholders and the company’s financial structure.