What is a Rights Issue?
A rights issue is when a company offers existing shareholders the right to buy additional shares at a discounted price, in proportion to their current holdings. It is a way to raise fresh capital from existing shareholders rather than the open market.
Example: A 1:3 rights issue at ₹150 (current market price ₹200) means for every 3 shares you hold, you can buy 1 additional share at ₹150. You are not obligated — you can let the rights lapse or sell them in the market (if listed).
Impact of Rights Issue on Share Price
After a rights issue, the share price adjusts to account for the dilution. The theoretical ex-rights price is calculated as:
- Theoretical Ex-Rights Price = (N × Market Price + Rights Price) / (N + 1)
- where N is the ratio (e.g., 3 for 1:3 rights issue)
Using the example: (3 × 200 + 150) / 4 = ₹187.50. Shareholders who exercise rights should see no change in overall portfolio value at this price — but those who do NOT exercise rights will face dilution.
Should You Exercise Rights?
Generally yes, if you have conviction in the company's prospects. Reasons to exercise:
- Discount to market price means immediate value accretion
- Not exercising dilutes your ownership percentage
Reasons to sell rights (if listed on exchange) or let lapse:
- Lack of liquidity to fund the purchase
- Loss of conviction in company fundamentals
What is a Bonus Share?
A bonus share issue (also called a stock dividend) is when a company distributes free additional shares to existing shareholders by capitalising its accumulated reserves. No cash leaves the company.
Example: A 1:1 bonus means for every share you hold, you get 1 free share. If you held 100 shares at ₹500, after 1:1 bonus you have 200 shares at ₹250. Your total value remains unchanged — ₹50,000.
Why Companies Issue Bonus Shares
- Signals confidence — management shows the company has strong reserves
- Makes shares more affordable by reducing price per share
- Improves liquidity of the stock
- Rewards loyal shareholders without cash outflow
Key Differences
- Cash flow: Rights issue brings in cash to company; bonus share is a bookkeeping entry with no cash
- Cost to shareholder: Rights require payment; bonus is free
- EPS impact: Both dilute EPS (more shares outstanding) — but rights issue also adds to earnings (if capital deployed productively); bonus does not change earnings
- Purpose: Rights = growth capital or debt repayment; Bonus = shareholder reward from reserves
Taxation
Bonus shares: Received at zero cost. When sold, the entire sale proceeds are treated as capital gain. Holding period for LTCG is measured from the date of allotment of bonus shares, not the original shares.
Rights shares: Purchased at issue price (cost basis). Capital gain measured from date of purchase.