Gisiri Stephen
Apr 2
Distinguish between a rights issue and a bonus issue?
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Apr 2
A rights issue and a bonus issue are both methods used by companies to raise capital, but they differ in their purpose and structure.
1. Rights issue:
- A rights issue is a method used by a company to raise additional capital by offering existing shareholders the opportunity to purchase new shares at a discounted price.
- The purpose of a rights issue is to raise capital for the company's operations or expansion plans.
- Existing shareholders have the right to purchase new shares in proportion to their existing shareholding, typically at a discounted price compared to the market price.
- Shareholders can choose to exercise their rights, sell them in the market, or let them expire.
- Rights issues dilute the ownership stake of existing shareholders if they do not participate in the offering.
2. Bonus issue:
- A bonus issue, also known as a scrip issue or a capitalization issue, is a method used by a company to issue additional shares to existing shareholders without any additional payment.
- The purpose of a bonus issue is to capitalize the company's reserves and increase the number of outstanding shares.
- Bonus shares are issued to existing shareholders in proportion to their existing shareholding, typically on a pro-rata basis.
- Bonus issues do not dilute the ownership stake of existing shareholders as they receive additional shares without any cash outlay.
- Bonus issues are often used as a way to reward shareholders and improve liquidity in the stock.
In summary, a rights issue involves offering existing shareholders the opportunity to purchase new shares at a discounted price to raise capital, while a bonus issue involves issuing additional shares to existing shareholders without any additional payment to capitalize reserves and increase the number of outstanding shares.
1. Rights issue:
- A rights issue is a method used by a company to raise additional capital by offering existing shareholders the opportunity to purchase new shares at a discounted price.
- The purpose of a rights issue is to raise capital for the company's operations or expansion plans.
- Existing shareholders have the right to purchase new shares in proportion to their existing shareholding, typically at a discounted price compared to the market price.
- Shareholders can choose to exercise their rights, sell them in the market, or let them expire.
- Rights issues dilute the ownership stake of existing shareholders if they do not participate in the offering.
2. Bonus issue:
- A bonus issue, also known as a scrip issue or a capitalization issue, is a method used by a company to issue additional shares to existing shareholders without any additional payment.
- The purpose of a bonus issue is to capitalize the company's reserves and increase the number of outstanding shares.
- Bonus shares are issued to existing shareholders in proportion to their existing shareholding, typically on a pro-rata basis.
- Bonus issues do not dilute the ownership stake of existing shareholders as they receive additional shares without any cash outlay.
- Bonus issues are often used as a way to reward shareholders and improve liquidity in the stock.
In summary, a rights issue involves offering existing shareholders the opportunity to purchase new shares at a discounted price to raise capital, while a bonus issue involves issuing additional shares to existing shareholders without any additional payment to capitalize reserves and increase the number of outstanding shares.
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