Difference between rights issue and bonus issue

Difference between rights issue and bonus issue

• A. A rights issue offers new shares to existing shareholders at a discount; a bonus issue gives shares to existing shareholders for free
• B. A rights issue is free; a bonus issue is at discount
• C. Both are funded from profits
• D. Both require no documentation

Answer: (A)

The key idea here is how each method treats funding and how shares are allocated to existing owners. A rights issue invites current shareholders to buy additional shares, usually at a price below the prevailing market price, to raise fresh capital for the company. It involves payment from investors who exercise their rights and often comes with an offer document describing the terms. By contrast, a bonus issue (also called a scrip issue) distributes additional shares to existing shareholders at no cash cost. It uses accumulated profits or reserves to capitalise share capital, increasing the number of shares without bringing in new funds. So the statement that matches reality is that a rights issue offers new shares to existing shareholders at a discount, while a bonus issue gives shares to existing shareholders for free. Note: the other options are inconsistent. Rights issues are not free and do not fund from profits in the same way as bonus issues; bonus issues are not discounts either. Both typically require some form of documentation and regulatory compliance.

The key idea here is how each method treats funding and how shares are allocated to existing owners. A rights issue invites current shareholders to buy additional shares, usually at a price below the prevailing market price, to raise fresh capital for the company. It involves payment from investors who exercise their rights and often comes with an offer document describing the terms.

By contrast, a bonus issue (also called a scrip issue) distributes additional shares to existing shareholders at no cash cost. It uses accumulated profits or reserves to capitalise share capital, increasing the number of shares without bringing in new funds.

So the statement that matches reality is that a rights issue offers new shares to existing shareholders at a discount, while a bonus issue gives shares to existing shareholders for free.

Note: the other options are inconsistent. Rights issues are not free and do not fund from profits in the same way as bonus issues; bonus issues are not discounts either. Both typically require some form of documentation and regulatory compliance.