<<–2/”>a href=”https://exam.pscnotes.com/5653-2/”>p>Right Shares and bonus shares are two important financial instruments that companies use to raise capital or reward existing shareholders. Both have their unique characteristics, benefits, and implications for investors. Understanding the differences, advantages, disadvantages, and similarities between right shares and bonus shares is crucial for making informed Investment decisions.
| Aspect | Right Shares | Bonus Shares |
|---|---|---|
| Definition | Right shares are new shares offered to existing shareholders at a discounted price, allowing them to maintain their ownership proportion. | Bonus shares are additional shares given to existing shareholders without any extra cost, based on the number of shares they already own. |
| Purpose | To raise additional capital for the company. | To reward shareholders and increase the liquidity of the shares. |
| Payment | Shareholders need to pay for the right shares, albeit at a discounted price. | Shareholders do not pay for bonus shares; they are issued free of cost. |
| Entitlement Ratio | Determined by the company, specifying how many new shares can be bought for a certain number of existing shares. | Determined by the company, specifying how many new shares are issued for a certain number of existing shares. |
| Effect on Share Capital | Increases the paid-up capital of the company. | Increases the number of shares but does not change the paid-up capital, as it is a capital reallocation. |
| Share Price Impact | Generally leads to a dilution of the share price due to the increase in the number of shares. | Reduces the share price proportionately due to the increase in the number of shares. |
| Voting Rights | Additional shares come with voting rights. | Additional shares come with voting rights. |
| Regulatory Approval | Requires regulatory approval and compliance with specific guidelines. | Requires regulatory approval but is generally easier to issue than right shares. |
| Impact on Earnings Per Share (EPS) | May initially dilute EPS as more shares are issued, though the capital raised can potentially boost future earnings. | Dilutes EPS as more shares are issued without any additional capital being raised. |
| Timing | Usually issued when the company needs to raise additional funds. | Usually issued when the company has accumulated reserves and wants to reward shareholders. |
| Market Perception | May be perceived as a positive signal that the company has Growth opportunities. | May be perceived as a positive signal of the company’s strong financial position. |
Advantages:
1. Capital Raising: Helps companies raise additional funds without incurring debt.
2. Ownership Retention: Allows existing shareholders to maintain their ownership Percentage.
3. Discounted Price: Shares are offered at a DISCOUNT, which can be beneficial to shareholders.
4. Market Confidence: Indicates that the company has investment opportunities and growth potential.
Disadvantages:
1. Dilution: May dilute the value of existing shares if shareholders do not participate.
2. Payment Requirement: Shareholders need to invest additional capital, which may not always be feasible.
3. Regulatory Hurdles: Requires compliance with regulatory procedures, which can be time-consuming.
4. Market Reaction: If not well-received, can negatively impact the share price.
Advantages:
1. Reward to Shareholders: Rewards existing shareholders without requiring additional investment.
2. Liquidity Increase: Increases the number of shares, improving liquidity in the market.
3. Positive Signal: Indicates strong financial Health and confidence in future earnings.
4. No Cash Outflow: Does not involve cash outflow for the company, as it utilizes reserves.
Disadvantages:
1. EPS Dilution: Dilutes earnings per share, as the number of shares increases without a corresponding rise in profits.
2. No Additional Funds: Does not raise additional capital for the company.
3. Perceived Overvaluation: Frequent bonus issues might be perceived as a sign of overvaluation.
4. Tax Implications: May have tax implications for shareholders depending on the jurisdiction.
Q1: What is the main purpose of issuing right shares?
A: The main purpose of issuing right shares is to raise additional capital for the company while allowing existing shareholders to maintain their ownership proportion.
Q2: Do shareholders have to pay for right shares?
A: Yes, shareholders have to pay for right shares, although they are offered at a discounted price compared to the Market Price.
Q3: How do bonus shares benefit shareholders?
A: Bonus shares benefit shareholders by rewarding them with additional shares at no extra cost, increasing their overall shareholding in the company.
Q4: Can bonus shares be issued without regulatory approval?
A: No, bonus shares require regulatory approval before they can be issued, although the process is generally simpler than that for right shares.
Q5: What happens to the share price after a bonus share issue?
A: After a bonus share issue, the share price typically decreases proportionately to reflect the increased number of shares in circulation.
Q6: Why might a company choose to issue right shares instead of taking a loan?
A: A company might choose to issue right shares instead of taking a loan to avoid incurring debt and interest obligations, thereby preserving financial flexibility.
Q7: Do right shares dilute existing shareholders’ ownership if they do not participate?
A: Yes, if existing shareholders do not participate in the right shares issue, their ownership percentage will be diluted as new shares are issued to those who do participate.
Q8: Are bonus shares taxable?
A: The tax treatment of bonus shares varies by jurisdiction. In some places, they might be subject to Capital Gains tax when sold, while in others, they may be tax-exempt.
Q9: How often can a company issue bonus shares?
A: There is no strict limit on how often a company can issue bonus shares, but frequent issues may raise concerns about the company’s valuation and financial strategy.
Q10: What is the typical ratio for right shares and bonus shares?
A: The ratio for right shares and bonus shares varies and is determined by the company based on its financial strategy and objectives. Common ratios for bonus shares might be 1:1, 2:1, etc., while right share ratios depend on the capital needs and existing share base.
Understanding these aspects can help investors make better decisions and align their investment strategies with their financial goals and risk Tolerance. Both right shares and bonus shares have their place in corporate finance, serving different purposes and offering distinct benefits and challenges to both companies and investors.