Bonus Shares vs Right Shares: Companies Act 2013 Guide
Explore the mechanisms of bonus and right shares under the Companies Act, 2013. Learn about legal provisions, capitalization of reserves, and raising capital.
Bonus Shares
& Right Shares
Understanding Share Issuance Mechanisms under the Companies Act, 2013
Issue, Impact & Implications
Corporate Finance | Companies Act, 2013
Table of Contents
Introduction
Bonus Shares – Meaning & Nature
Bonus Shares – Objectives, Sources & Legal Provisions
Right Shares – Meaning & Nature
Right Shares – Objectives & Legal Provisions
Comparison & Conclusion
Corporate Finance | Companies Act, 2013
Introduction
In corporate finance, companies often need to manage their capital structure efficiently while maintaining shareholder confidence. One key mechanism is the issuance of additional shares to existing shareholders.
Among the various methods, Bonus Shares and Right Shares are two important mechanisms under the Companies Act, 2013.
Bonus Shares
Issued free of cost by capitalizing accumulated reserves
Right Shares
Offered at a concessional price to raise fresh capital
Corporate Finance | Companies Act, 2013
Bonus Shares
Meaning & Nature
What are Bonus Shares?
Bonus shares are additional shares issued by a company to its existing shareholders free of cost, in proportion to their existing shareholding. They are distributed by converting accumulated reserves or profits into share capital.
📌 Example: In a 1:1 bonus issue, a shareholder holding 100 shares receives 100 additional shares at no cost.
Nature of Bonus Shares
No new funds enter the company
Represents reclassification of reserves into share capital
Number of shares increases, but net worth remains unchanged
Bonus Shares = Capitalization of Reserves — NOT fresh capital
Corporate Finance | Companies Act, 2013
Bonus Shares
Objectives & Sources
Why Companies Issue Bonus Shares
Capitalization of Profits
Convert large reserves into share capital for a balanced structure
Rewarding Shareholders
Reward existing shareholders without cash outflow
Improving Marketability
Lower market price per share increases affordability & liquidity
Enhancing Company Image
Signals strong financial health and consistent profitability
Valid Sources for Bonus Issue
Free Reserves
Securities Premium Account
Capital Redemption Reserve
Cannot be issued from:
Revaluation Reserves or Unrealized Gains
Corporate Finance | Companies Act, 2013
Bonus Shares
Legal Provisions – Section 63
Authorized by AOA
Must be permitted by Articles of Association
Board & Shareholder Approval
Approved by Board of Directors and shareholders
No Default on Debt
No default in payment of interest or principal on debt securities
No Default on Employee Dues
No default in payment of statutory dues of employees
Fully Paid-Up Shares Only
Bonus shares can only be issued on fully paid-up shares
Irrevocable Once Announced
Bonus issue cannot be withdrawn once declared
Corporate Finance | Companies Act, 2013
Bonus Shares
Advantages & Disadvantages
Advantages
Disadvantages
For the Company
For Shareholders
No cash outflow – conserves liquidity
Enhances credibility and market perception
Restructures capital without external funds
Additional shares at no cost
Increased liquidity
Psychological sense of gain
Reduces accumulated reserves
No additional funds raised
EPS may decrease due to more shares
No immediate cash benefit
Impact: Total investment value remains same initially; market price adjusts after issuance
Corporate Finance | Companies Act, 2013
RIGHT SHARES
Meaning & Nature
What are Right Shares?
Right shares are additional shares offered by a company to its existing shareholders at a concessional price, in proportion to their existing shareholding.
Shareholders get a preferential right to purchase before public offering.
📌 Example: In a 1:2 rights issue, a shareholder holding 200 shares can purchase 100 additional shares at a discounted price.
Nature of Right Shares
Actual inflow of fresh funds into the company
Shares offered at below-market (concessional) price
Shareholders may accept, reject, or renounce their rights
Right Shares = Fresh Capital Raised — Shareholders Pay a Discounted Price
Corporate Finance | Companies Act, 2013
Right Shares
Objectives & Legal Provisions
Why Companies Issue Right Shares
Raising Additional Capital
Cost-effective way to fund expansion, debt repayment, or business needs
Maintaining Ownership Control
Existing shareholders retain proportional ownership
Avoiding Public Issue Costs
Rights issues are less expensive and faster than public offerings
Key Provisions – Section 62
Offered proportionally to existing shareholders
Notice must specify number of shares & time limit
Minimum 15 days response window for shareholders
Unsubscribed shares may be offered to others if not accepted
Governed by Section 62, Companies Act, 2013
Corporate Finance | Companies Act, 2013
Right Shares
Advantages & Disadvantages
Advantages
For the Company
Additional funds for growth and expansion
Less costly and time-consuming than public issues
Maintains control within existing shareholders
For Shareholders
Buy shares at a discounted price
Maintain ownership percentage
Potential for increased returns if company performs well
Disadvantages
For the Company
Limited fund-raising scope vs. public issues
Success depends on shareholders' willingness to invest
For Shareholders
Requires additional financial investment
Ownership diluted if rights not exercised
Fresh funds raised; market price adjusts post-issue depending on subscription levels
Corporate Finance | Companies Act, 2013
Bonus Shares vs Right Shares
Corporate Finance | Companies Act, 2013
Basis
Bonus Shares
Right Shares
Nature
Issued free of cost
Issued at concessional price
Purpose
Capitalization of reserves
Raising fresh capital
Cash Flow
No inflow of funds
Brings in new funds
Shareholder Obligation
No payment required
Payment required
Ownership
Proportion remains same
Maintained only if subscribed
Source
Existing reserves
Fresh issue of capital
Conclusion
Bonus Shares
Issued free of cost
Capitalizes accumulated reserves
Rewards shareholders without cash outflow
No new funds; net worth unchanged
Right Shares
Offered at discounted price
Raises fresh capital for growth
Preferential right to existing shareholders
Maintains ownership if subscribed
Both Bonus and Right Shares are essential tools for capital management — enabling companies to restructure, raise funds, and maintain shareholder relationships strategically.
Corporate Finance | Companies Act, 2013
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