Right Shares vs. Bonus Shares

Introduction

ABBA’s famous song “Money Money Money,” says that money is a funny thing in a rich man’s world. That could have some merit since a rich man always has too much of it and does not always know what to do about it. Hence, we see extravagant purchases of private jets, a redesigning of an ancient chateau, an acquisition of a football club etc. as their ways of keeping themselves entertained and staying rich. Well, at least some rich men do those things. Others make investments.

Thinking long term, investments most often provide a safety net in the financial world. Investments are considered a way to create wealth and can be done by devoting a portion of the income into investment vehicles like stocks, real estate, mutual funds, bonds etc. Each of these investment vehicles carries its own set of risks which is why the terms and conditions clause is given utmost importance following any advertisement of the same. It is quite like gambling and while winning has its peaks to stay steady is a more desirable state. It is certainly more desirable than losing.

Shares are such investment vehicles as well. A share is called so since it is a share or part of the company that is owned by a person. And there are a variety of shares like – preference shares, equity shares and voting shares. Becoming a shareholder of a company further gives you perks more than just owning a piece of the company. The shareholders become eligible for advantages concerning their shares like right shares and bonus shares. Yes, they are both advantageous shares but their advantages are rather different.

Differences Between Right Shares and Bonus Shares in a Tabular Form

Parameter	Right Shares	Bonus Shares
Meaning	Right shares are offered to the shareholders at a lesser price and the shareholders are given the option to either use it or deny it.	Bonus shares are offered to the shareholders at no cost i.e. they are free and are provided at a ratio dependent on the proportion of ownership of the shareholder.
Purpose	To increase the additional capital of the company.	To reduce the share price and also to increase the dividend for the shareholders.
Price	The right shares can be bought for a price that is lesser than the market value.	The bonus shares are free of cost.
Minimum subscription	For purchasing the right shares, a minimum subscription is compulsory.	For bonus shares, there is no requirement for a subscription.
Creation	The right shares are created additionally by the company.	The bonus shares are created from the surplus, profits and reserves of the company.
Renunciation	Right shares can be renounced partly or fully.	With bonus shares, there is no option of renunciation.
Effect on market share price	The right shares may or may not decrease the effect on the market depending on if they are kept or sold by the shareholders respectively.	The bonus shares always decrease the effect on the market price of shares. The rate is dependent on the ratio.
Effect on the company’s capital	Purchase of the right shares ensures a rise in the capital of the company.	Bonus shares do not contribute to the capital of the company i.e. the net assets of the company stay the same.
Paid-up value	Right shares are fully or partly paid-up.	Bonus shares are always fully paid-up.

What are Right Shares?

When a company is in desperate need of money, the right shares offer a rescue. Right shares are shares issued by the company to its existing shareholders at a price that is lesser than the market value for a certain period. The fact that it is offered at a discounted price makes the option to purchase them rather lucrative to the shareholders. The shareholders, however, must subscribe to a minimum number of shares if they agree or they can refuse the right shares altogether. The main purpose of the right shares is so that the company can raise its value – its capital. It is a quick way to increase the company’s prevailing capital. The way this comes about is the shareholders purchase these shares and increase their stake in the company and the money gained from their purchase adds to the capital.

Added money from the right shares can further be used by the company to clear its debt obligations or to further its expansion by acquisition of assets etc. Thus, the right shares contribute to the positive cash flow of the company which can be used to improve the functioning of the company and prepare it for takeover or expansion. Since the existing shareholders are the ones who purchase the right shares, the control to keep or sell the right shares lies with them.

There are 2 types of right shares issued. They are:

Renounceable right issue: The shareholder with these right shares can transfer or renounce their claim to these shares to anyone, even a person who is not a shareholder of the same company.
Non-renounceable right issue: the shareholder with these right shares cannot transfer the right shares to anyone. They have only 2 options. Either they can skip and not purchase the shares or purchase the shares for themselves.

Right shares can prove advantageous to the shareholders as they cause the shareholder to increase their stake in the company at a lower cost since the right shares are offered at a discounted price than the market value. The right shares also save the company a lot of money that usually gets wasted on advertisements, underwriting fees etc.

What are Bonus Shares?

Bonus shares are a shareholder’s reward. They are issued free of cost and are dependent on the shareholder’s stake in the company. When a company sees profits, the shareholders rightfully can claim a cash dividend for their investment. A cash dividend is part of the profits from the company. When such a cash dividend cannot be provided by the company due to liquid funds, they usually offer bonus shares. Thus, bonus shares are shares offered to the existing shareholders instead of the cash dividend and they are offered in proportion to their ownership of shares and shareholder rights.

Bonus shares are created in the following ways:

When there is excess capital: If the shareholders are lucky and the company is on a lucky spree of profits, the excessive profits increase the capital. Such excess is divided and offered up as bonus shares to the shareholders.
To increase the liquidity of stock: when a company offers bonus shares, it shows that they are doing rather splendidly and are in good financial health. This improves the liquidity of the stock of the company and urges participation in retail.
To satisfy the need for dividends: when the company cannot offer the cash dividend to the shareholder, the bonus shares are the only alternative.

The issue of bonus shares reduces the share value in the market. This makes the option for the purchase of the company shares more desirable to the common people. Hence, the company achieves more investors as the share prices get appreciated. Other advantages for the shareholders of the bonus shares are that these shares are free. They need not pay anything for these shares. They are also free of tax at the time of issue, unlike the cash dividend. The shareholders with bonus shares can choose to increase their profits by selling their bonus shares at a higher price.

Bonus shares serve to restructure the company’s finances. Since they do not involve any cash flow, they do not influence the net assets of the company but increase the share capital of the company. Bonus shares are an indication that the company is doing well. They also show that the company is confident in increasing its profits. Nevertheless, it is essential to remember that while purchasing shares in a company, the objective should not be only to receive the bonus shares offered by the company. The company should be thoroughly researched their foundation and goals before committing to them.

Main differences Between Right Shares and Bonus Shares in Points

Following are the main differences between right shares and bonus shares:

The right shares are those shares that are offered to the shareholders of the company at a discounted rate. The shareholders can choose to accept or deny these shares. The bonus shares, on the other hand, are free and simply given to the shareholders at a ratio that is dependent on their stake in the company.
The right shares are issued to increase the additional capital of the company whereas the bonus shares are issued to decrease the share price and increase the dividend for the shareholders.
With the right shares, the objective is to increase the company capital while with the bonus share, the net assets of the company stay the same.
The reason right shares are issued is so that the company capital can be raised. The reason for bonus shares to be issued is primarily because the company is unable to provide the cash dividend.
The right shares have to be bought for a price. The price, however, is lesser than the market value. The bonus shares are, contrarily, free of cost.
To purchase the right shares, the shareholders must have a minimum subscription while the bonus shares are simply offered freely by the company to the shareholders and require no subscription.
With the right shares, the share price is affected depending on if the shareholders keep or sell the right shares to the market. With bonus shares, the share price always reduces since the shares are offered to the shareholders dependent on a ratio.
The right shares are created additionally by the company while the bonus shares are created out of the profits, surplus and reserves of the company.
The right shares can be renounced partially or completely by the shareholders but this option is unavailable to those having bonus shares.
The right shares are either partly or fully paid up while the bonus shares are always fully paid up.

Conclusion

While both serve to raise the financial status of the company in one way or another, the right shares and the bonus shares are capable investment vehicles for the shareholders. With the right shares, the shareholders are given shares for a lower price that can increase their stake in the company thereby increasing the capital of the company. These right shares bought by the shareholders can further either be kept or sold to the market. This affects the market price of the shares and the company. The money that the company makes from the issue of right shares benefits the company greatly. With the added capital, the company can use the money to clear its debts or acquire new assets for expansion.

The bonus shares can be considered gifts for the shareholders. When the company has excessive profits, or surplus or when they are unable to provide the shareholders with the cash dividend, they provide bonus shares. These shares are offered in a ratio based on the proportion of ownership the shareholders have in the company. While the number of shares increases, the price, however, stays the same. Thus, the share price is reduced and the net assets of the company remain. In the market, due to the reduced price, the number of investors increases, which fosters the growth of the company proving it to be profitable. ABBA’s Money song also says that while it is funny to have money, the rich man also has a world that’s always sunny. With investments in shares and evaluating the stock market just right, not just a rich man but anyone could have sunny days for the rest of their lives. But it is crucial to remember that the stock market comes with its risks and being vigilant about these risks is of paramount importance if you are making a heavy investment. Knowing the company in and out along with knowledge of the market and current trends is a necessity when it comes to such ventures.

References

Introduction
Right Shares vs. Bonus Shares
Differences Between Right Shares and Bonus Shares in a Tabular Form
What are Right Shares?
What are Bonus Shares?
Main differences Between Right Shares and Bonus Shares in Points
Conclusion
References

Difference Between Right Shares and Bonus Shares

Introduction