Rights Issue vs Bonus Issue

Imagine two very different letters a housing society might send its existing residents. One asks each resident to pay in additional money, at a favourable, below-market rate, to fund a needed building repair, giving each contributing resident a larger eventual share of the property. The other simply announces that every resident's existing flat is being notionally split into two smaller units, doubling their unit count but changing nothing about the actual building or their proportional ownership of it. A rights issue and a bonus issue work on almost exactly these two different logics.

A rights issue is a genuine capital raise: the company offers existing shareholders the right to buy additional shares, in proportion to what they already hold, typically at a discount to the current market price, as an incentive to participate. Shareholders who take up the offer pay real money, which flows onto the company's balance sheet exactly like a fresh issue in an IPO. Shareholders who decline can often sell their rights entitlement to someone else instead, or simply let their proportional ownership dilute slightly.

A bonus issue involves no cash changing hands at all. The company capitalises part of its reserves, accumulated profits sitting on the balance sheet, converting them into new shares distributed free to existing shareholders in a fixed ratio, say one additional share for every two already held. The company's total value does not change, and neither does each shareholder's actual proportional ownership, there are simply more, individually cheaper shares representing the exact same total stake.

Companies choose a rights issue when they genuinely need fresh capital and want to raise it from existing shareholders specifically, often at friendlier terms than a public market issue might offer. They choose a bonus issue for very different reasons, usually to improve share price affordability and trading liquidity by lowering the per-share price without diluting anyone's actual ownership stake, or simply as a signal of confidence in future earnings capacity.

Whenever a stock's price appears to fall sharply on the day of a corporate action without any real loss of shareholder value, a bonus issue or a stock split, a related mechanism that similarly divides existing shares into more, cheaper units without raising any capital, is almost always the explanation, the share price adjusts mechanically downward exactly in proportion to the increase in share count, leaving each shareholder's total holding value genuinely unchanged.