In the world of corporate finance, companies often reward their shareholders or raise capital through issuing bonus shares or conducting a rights issue. Although both involve issuing additional shares, they serve different purposes and come with distinct implications for the company and its shareholders. Understanding the differences is imporatant for investors and businesses alike.

What are Bonus Shares?

Bonus shares are additional shares given to existing shareholders without any extra cost, based on the number of shares they already hold. These shares are issued from the company's accumulated profits or reserves, which are not distributed as dividends but rather converted into additional shares-.

- Legal Provisions for Bonus Shares in India

• Governed by Section 63 of the Companies Act, 2013.

• Bonus shares can be issued from free reserves, securities premium account, or capital redemption reserve.

• The company must ensure that its Articles of Association permit the issuance of bonus shares.

• Bonus shares cannot be issued in lieu of dividends.

- Government Rules

• The company must ensure that all statutory dues and obligations are cleared.

• Filing with the Registrar of Companies (ROC) via Form PAS-3 is mandatory.

• Bonus shares must be issued proportionately to existing shareholders.

What is a Rights Issue?

A rights issue is an offer by a company to its existing shareholders to purchase additional shares at a discounted price. This method helps companies raise additional capital while giving current shareholders the opportunity to maintain their proportionate ownership in the company.

- Legal Provisions for Rights Issue in India

• Governed by Section 62 of the Companies Act, 2013.

• Companies must comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

• Shareholders are given the option to accept, decline, or renounce the offer.

• The company must send a letter of offer to all eligible shareholders.

- Government Rules

• Companies must adhere to SEBI's prescribed timelines and disclosure requirements.

• The price and ratio of the rights issue must be clearly communicated to shareholders.

• Unsubscribed shares may be offered to other investors or existing shareholders.

Key Differences Between Bonus Shares and Rights Issue

Process of Issuing Bonus Shares

• Board Approval: The Board of Directors must approve the issuance of bonus shares.

• Shareholder Approval: If the Articles of Association require it, shareholder approval is necessary.

• Compliance Filing: File Form PAS-3 with the ROC post-approval.

• Record Date: Set a record date to determine eligible shareholders.

• Share Allotment: Bonus shares are credited to shareholders' Demat accounts.

Process of Conducting Rights Issue

• Board Resolution: Pass a resolution to approve the rights issue.

• Offer Letter: Draft and send an offer letter to eligible shareholders.

• Record Date: Establish a record date for determining eligible shareholders.

• Subscription Period: Allow shareholders to subscribe, renounce, or reject the offer within the specified timeline.

• Share Allotment: Allocate shares to applicants and credit them to their Demat accounts.

Advantages and Disadvantages

- Bonus Shares

Advantages:

• Enhances investor confidence by rewarding loyal shareholders.

• Increases share liquidity in the market.

• Reflects the company’s financial strength.

Disadvantages:

• Dilutes Earnings Per Share (EPS).

• Does not result in new capital inflow for the company.

- Rights Issue

Advantages:

• Raises fresh capital without increasing debt.

• Offers shareholders a chance to invest more at a discounted price.

Disadvantages:

• If not subscribed, shareholders may face dilution of ownership.

• The market price may fall due to the discounted share offering.

FAQs on Bonus Shares vs. Rights Issue

- Can a company issue bonus shares without profits?

No, bonus shares can only be issued from accumulated profits or reserves, not from borrowed funds.

- Do shareholders need to pay for bonus shares?

No, bonus shares are distributed free of cost to shareholders.

- What happens if a shareholder ignores a rights issue?

Ignoring a rights issue could lead to dilution of ownership, as new shares will be issued to other investors.

- Can rights be sold to others?

Yes, in a renounceable rights issue, shareholders can transfer their rights to others.

- Are there tax implications for receiving bonus shares?

No immediate tax is payable upon receiving bonus shares. However, capital gains tax will apply when they are sold.

- How is the price decided in a rights issue?

The company determines the price, typically set below the current market price to attract existing shareholders.

- Is SEBI approval required for issuing bonus shares?

While SEBI approval is not mandatory for bonus issues, compliance with SEBI's listing requirements is essential.

- Can a company undertake a bonus and rights issue simultaneously?

Yes, but each must adhere to separate compliance procedures and timelines.

- Do bonus shares increase the company’s value?

No, bonus shares only increase the number of outstanding shares but do not affect the company's valuation.

- How long does a rights issue process take?

It typically takes around 3-6 months, depending on regulatory approvals and shareholder responses.

Conclusion

Understanding the differences between bonus shares and a rights issue is essential for making informed investment decisions. While bonus shares serve as a way to reward shareholders and capitalize reserves, rights issues are designed to raise additional capital while offering existing shareholders the chance to retain their stake. Both options are governed by specific SEBI and ROC regulations in India, ensuring transparency and fairness. For companies, choosing the right option depends on financial needs and strategic goals. For shareholders, participating in these offers can significantly impact their investment value and future returns.