Definitions and explanations
According to the Companies Act, 2013 an organisation is allowed to further raise its subscribed capital by allotting new shares at discounted rates to existing shareholders. Such shares are termed right shares, which are issued in accordance with their existing holdings on pro-rata basis.
The organisation may send a letter notifying the owners of such an issue with the choice to accept or forfeit the right to purchase these shares within a given period of time, after which the shares may be issued to the general public or preferential investors through a special resolution. If the shareholder opts to exercise his right, he has to mention the number of shares being purchased by him. The shareholders can partially or completely renounce their right to purchase such shares as well.
When a company earns profits above and beyond its normal profits, it may decide to distribute the capital as shares to it’s existing shareholders, free of cost. Such shares are known as bonus shares, and are allotted in proportion to the number of shares already being held by the owners. This issue also brings the market value of shares to a publicly attractive range because the entity’s net worth does not go through any change; only the total number of shares increase.
According to the companies act 2013, the organisation can issue fully paid-up bonus shares out of
- Free reserves
- Securities premium account
- Capital redemption reserve account
Difference between right shares and bonus shares
The main difference between right shares and bonus shares are given below:
Right shares is the additional issue of shares for only existing members of the company, where the existing shareholders have the “right” to subscribe to such an issue on preferential basis unless reserved otherwise for some other individuals. However, bonus shares refer to the issue of shares to the members of the organization when the said organization earns super-normal profits. The amount of profits is converted to capital and distributed in proportion to the number of shares held by each member.
2. Paid-up value of shares
Right shares can either be partly or fully paid-up depending upon the proportion of the value paid-up of the existing shares. Bonus shares are always fully paid-up
3. Price of the shares
Right shares are issued at a discounted price whereas bonus shares are issued free of cost.
4. Objective of such issue
The objective of issuing right shares is to raise further capital for the organisation whereas the objective of bonus shares is to bring the market value of shares to a publicly attractive price.
5. Minimum subscription clause
Minimum subscription is compulsory for right issue but not a valid criteria for bonus issue.
6. Renunciation of shares
The owners can partly or fully renounce their title to right shares whereas no such renunciation exists for bonus shares.
7. Effect on balance sheet
With the issue of right shares, the organization’s balance sheet shows an increase in subscribed capital as further capital was raised through such an issue. The effect of bonus issue does not show in the subscribed capital of an organisation as the net worth of the organisation does not change. Only the value per share held by the owners decreases as the total number of shares held increases.
Right shares versus bonus shares – tabular comparison
A tabular comparison of right shares and bonus shares is given below:
|Partly or fully paid-up||Fully Paid-up|
|Price of Shares|
|Discounted price||Free of cost|
|Objective of Issues|
|Raising fresh capital for the organization.||Bringing the market value of the shares within an attractive range.|
|Owners can fully or partly renounce their rights||No renunciation|
|Effect on Balance Sheet|
|Increased subscribed capital||No change|