Rights issue vs bonus issue of shares

A limited company can put more of its shares into circulation for two quite different reasons. The two are easily muddled because they share the word “issue”.

A rights issue and a bonus issue both increase the number of shares, and both are offered to existing owners. But one brings fresh money into the business and the other brings in nothing.

Whether cash comes in separates the two completely. It decides what happens to the company’s resources, its capital and each shareholder’s wealth.

Two ways to give owners more shares

Both create new shares and hand them to existing owners. A rights issue is an invitation: shareholders are asked to buy more shares in proportion to what they already own. A bonus issue is a gift: shareholders receive extra shares without paying.

One asks owners to put in money. The other asks nothing. Everything else follows from that.

A rights issue: raising new money from existing owners

A company that needs funds turns first to people who already own it. Each shareholder is offered the right to buy new shares in proportion to their holding, for example one new share for every four held.

The price is usually a little below the market price, to make the offer worth taking up. A shareholder who accepts pays that price in cash, and the company receives it.

If enough owners take up their rights, real money flows in. The bank balance rises, and so does share capital, because new shares were sold.

A rights issue raises money without borrowing. Instead of a loan, the company asks its owners to invest more.

A bonus issue: turning reserves into shares

In a bonus issue, shareholders receive extra shares free, again in proportion to their holdings. Nobody pays, so where do the new shares come from? The company converts part of its reserves into share capital.

Reserves are profits kept back over the years instead of paid out. A bonus issue takes a slice of them, reclassifies it as permanent share capital, and issues new shares to represent it.

No ringgit enters or leaves the business. The company rearranges what it already has.

The question that separates them: does cash come in?

Ask: after the issue, does the company hold more resources than before? For a rights issue, yes. Shareholders paid money, and the company has cash it did not have.

For a bonus issue, no. The shares were free, and the value behind them was already in reserves. So a rights issue raises finance and a bonus issue does not.

One brings new wealth in from outside. The other moves wealth from one part of equity to another.

What each does in the accounts

A rights issue increases the bank balance and share capital, so total equity grows. A bonus issue brings in nothing, so total equity is unchanged.

Suppose reserves of RM150,000 fund a bonus issue. This figure is illustrative.

Reserves fall by RM150,000 and share capital rises by RM150,000. The pieces are rearranged but the owners’ overall claim is the same.

Why a bonus issue leaves owners no richer

A bonus issue brings in no new resources, so it cannot make shareholders wealthier, even though everyone holds more shares. The company is worth the same as before.

That value is now divided among more shares, so each is a smaller slice. This is where the word “bonus” can mislead.

Real reward comes from the company creating value, not from cutting existing value into more pieces. A rights issue does change what an owner has, but only because the owner chose to invest more.

Why a company chooses each

A rights issue suits a company that needs money to expand, repay a loan or fund a new venture. It prefers to raise it from committed owners rather than take on debt.

A bonus issue serves other aims. It can put a large pile of long-held reserves on a firmer footing as share capital.

It can also lower the price of each share so that shares trade more easily. A bonus issue never raises cash.

Looking past the word “issue”

Both are issues of shares, but that label describes the mechanism, not the meaning. Keep one distinction in mind. A rights issue is money coming in from owners.

A bonus issue is reserves being reshaped with no money at all. One is about financing the business. The other is about how its capital is arranged.

If your child treats a rights issue and a bonus issue as the same event, one of our teachers can separate them with clear worked examples. The cash question then becomes second nature. Book a trial class