Rights issue vs bonus issue

Rights issue refers to that issue in which a company gives rights to their existing shareholders to purchase additional shares in the company at a discounted price to the market price within a stipulated time frame. On the other hand, bonus issues are distribution of the company’s accumulated earnings, which instead of being given out in the form of dividends is converted into additional or free shares to current shareholders in proportion to each one’s stake without any additional cost.

In both the cases, the stock price of the company issuing rights shares and bonus issue gets adjusted after the record date, which is a cut-off date set by the company. For example, a 1:4 rights issue would mean an existing investor can buy one extra share for every four shares already held. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.

In the case of bonus issue, if the company has announces a 1:1 bonus issue and the stock price is Rs 300, then after a bonus issue, the stock price should logically reduce to Rs 150.

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