The Differences Between Rights Issue and Bonus Issue in Malaysia Companies
The Constitution of a company may provide that all further issues of shares be offered to the existing shareholders pro rata to the existing equity holdings. The shareholders are said to have pre-emption rights. If the shares are issued at discounted price to the existing shareholders, such an offer is called rights issue, however, in the case of bonus issue, the shareholders get the shares for free.
Both the issues increase the issued shares of the company but they are different in terms of their creation, purpose, transaction, subscription requirement, renunciation option and effect on share price.
- Rights Issue
A rights issue or rights offer is given to the existing shareholders a pre-emptive right, but not the obligation, to subscribe for additional new shares directly from the companies at a discount on the current market price on a predetermined date. It is a way for a company to raise fresh capital by giving shareholders a chance to increase their exposure to the stock at a special price.
The number of shares that shareholders can apply depends on their existing shareholding. Usually, the rights are offered on a ratio basis. For example, a one-for-five rights issue means that shareholders can apply for one extra share for every five shares held by them.
The companies might offer the rights issue to its existing shareholders under two scenarios:
(1)
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When the company is short of cash, it can improve the financial structure by turning rights issues to capital to cover its debt obligations without incurring additional debt from a bank or financial institution with high interest rates.
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(2)
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Not all companies that pursue rights offering are in financial trouble. Companies with clean balance sheets may use rights issue to raise additional funds for business expansion such as acquisition. Instead of opting for debt, approaching the existing shareholders is an easier and better way of raising funds as it will not have an obligation of fixed interest payments.
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Until the date at which the new shares can be purchased, shareholders have the following options:
(1)
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Take up the rights
Shareholders may subscribe a portion or all their rights entitlements to purchase the additional shares.
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(2)
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Renounce the rights
It means that after accepting the right, instead of being overweight on the share, the shareholders can make quick gain by selling their rights entitlement to other investors who are not the current shareholders but interested in buying the company’s shares at a discounted price. However, it is not allowed to sell or transfer the rights to others under a non-renounceable rights issue.
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(3)
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Ignore the rights
If the shareholders with the rights entitlements choose not to accept the offer, their shares would be diluted after the release of additional shares into the market, and they would have less ownership in the company.
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Shareholders should understand that this is a right but not an obligation. They should look beyond the discount offered and subscribe to the rights only if they are completely sure of the company’s performance and future potential. If the market price is lower than the rights issue, then they should not consider going for the rights issue. In conclusion, before accepting a rights issue, shareholders must be cautious, and a little bit of evaluation would be required.
- Bonus Issue
A bonus issue is an offer given to the existing shareholders of the company to subscribe for additional shares at zero cost in specified proportion of shares that they already held without any conditions. For example, the company may decide to allot one bonus share for every five shares held by shareholders.
After a bonus issue, the total number of shares issued of the company increases but the ratio of the shares owned by the existing shareholders remain the same if there is no fractions arise from the issue. Bonus issue does not involve any cash outflow. In fact, all that is involved are book entries in the accounts of the company for the transfer of the company’s retained profits or reserves available to the share capital account to pay up the bonus shares which are to be distributed to the shareholders. Thus, the net worth of the company will remain the same.
The purposes of the company issues bonus shares are:
(1)
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To promote more active trading of the shares by increasing the number of shares in the market and reducing the price per share, making the shares more affordable and appealing to the investors.
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(2)
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Alternative to paying cash dividend to its shareholders due to shortage of funds. Instead of paying cash dividends, the company convert its retained earnings to bonus shares to reward its shareholders and build shareholder confidence.
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(3)
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To reflects sound financial health. When a company issues bonus shares out of profit or reserves, it reflects that the company is financially sound to keep growing and adding shareholder value.
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Bonus issue brings advantage to the long-term shareholders of the company who want to multiply their investment. When the company declares a dividend in the future, the shareholders will receive a higher dividend corresponded with their increased shareholdings as a result of the bonus issue. Further, issuing bonus shares, share price of the company will reduce in the market due to the increase in company’s total number of issued shares. It will enhance the liquidity to the shareholders to sell the shares to other parties and get cash in return.
- Differences between Rights Issue and Bonus Issue
Below are the differences between a rights issue and bonus issue:
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DIFFERENCE
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RIGHTS ISSUE
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BONUS ISSUE
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Creation
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Issued at a discounted price within a stipulated period.
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Issued at free of cost.
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Purpose
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The purpose is to raise fresh capital in the company.
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The purpose is to reward shareholders in the form of shares instead of cash dividends and to bring the market price of the shares within attractive range.
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Transaction
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The company receives cash from the shareholders.
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Created out of accumulated profits and reserves.
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Subscription Requirement
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A minimum subscription is mandatory as shareholders need to pay for the issue.
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Subscription is not necessary as shares are issued at no charge to the shareholders.
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Renunciation Option
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Rights can be renounced either completely or partially under a renounceable rights issue.
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No renunciation option is available.
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Effect on Share Price
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Share price can be affected to some extent due to dilution in the value of the shares.
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Share prices reduce according to the proportion of bonus shares.
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Nevertheless, both rights issue and bonus issue have few similarities:
(1)
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Both are made for the existing shareholders.
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(2)
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Both increase the number of issued shares in the share capital of the company.
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(3)
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Both are ordinary classes of shares.
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(4)
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Both increase the liquidity in the market for the shareholders to transact easily.
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(5)
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Neither of the issues dilute the existing shareholders?ownership in the company if all the shareholders accepted all the new shares and/or there is no fractions arise from the issues.
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(6)
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Shareholders benefit from both issues as one comes at a discounted price, and one comes free of cost.
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Rights issues and bonus issues are issued by the company to serve different purposes. A rights issue is preferred when the company needs funds for business activities and repayment of the debt, whereas a bonus issue is considered as an alternative to dividend outflow to restrict the cash outflow. Thus, based on the needs of the operation of business, the respective strategy is pursued by the management of company.
Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.
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