Rights Issues & Bonus Shares
Why a company can issue millions of brand-new shares to its existing shareholders for free — and why that alone doesn't make any single shareholder a single rupee richer or poorer.
In plain English
Imagine a listed company wants to raise fresh capital to pay down debt. Instead of borrowing more, or selling shares to entirely new investors, it offers EXISTING shareholders the right to buy additional new shares, in proportion to what they already hold, often at a discount to the current market price — this is a Rights Issue. Separately, a company might decide to issue additional free shares to existing shareholders, in a fixed ratio, without asking them to pay anything at all — this is a Bonus Issue. Both change the number of shares outstanding, but only one of them actually brings any new cash into the company — and understanding that distinction is essential to correctly interpreting both.
Words you'll need first
An offer to existing shareholders to buy new shares in proportion to their current holding, typically at a price below the current market price, within a specific subscription window. It genuinely raises NEW CASH for the company, which is why it directly affects the balance sheet's cash and equity, unlike a bonus issue.
Additional shares issued FREE to existing shareholders, in a fixed ratio to their current holding, funded entirely by converting the company's own existing reserves into additional share capital. No new cash comes into the company at all — it's purely an internal reclassification within equity, and a shareholder receiving bonus shares ends up holding more shares, each representing a proportionally smaller slice of the exact same company.
Rights issue vs bonus issue — what's actually different
Rights Issue
Shareholders PAY for the new shares (usually at a discount), so genuine new cash flows into the company, increasing both total assets and total equity. Shareholders who don't participate get diluted; those who do maintain their percentage ownership.
Bonus Issue
Shareholders pay NOTHING; existing reserves are simply reclassified into share capital. Total equity stays exactly the same. EVERY shareholder receives bonus shares in the same fixed ratio, so nobody's percentage ownership changes at all, even though everyone now holds more individual shares.
A worked example, with numbers
| Item | Before rights issue | After rights issue |
|---|---|---|
| Shares outstanding | 100 crore | 106.67 crore |
| Cash raised (6.67 crore new shares × ₹120) | — | ₹800 crore raised |
| Total equity (market value, approximately) | ₹15,000 crore | ₹15,800 crore |
| Theoretical ex-rights price per share | ₹150 | ≈₹148.13 |
- The rights issue brings ₹800 crore of genuine new cash into the company, directly increasing both its cash balance and its total equity — a real capital infusion, unlike a bonus issue.
- Because new shares are issued at a discount to the pre-issue market price, the theoretical 'ex-rights' price after the issue works out slightly below the pre-issue price — this isn't shareholders losing value, it simply reflects the total company value now being spread across a larger number of shares.
- A shareholder who fully participates in the rights issue maintains their exact percentage ownership; a shareholder who chooses NOT to participate sees their percentage ownership diluted.
- Ind AS 33 specifically requires prior-period EPS figures to be adjusted retrospectively for the discounted, below-market element of a rights issue, so that year-on-year EPS comparisons remain meaningful and aren't distorted by the mechanical share-count increase alone.
What it does to the financial statements
Impact on the P&L
- Neither a rights issue nor a bonus issue has any direct impact on net profit — both are purely capital-structure transactions, changing the number of shares outstanding and, for a rights issue, the company's cash position.
- Both mechanically affect Earnings Per Share, since the same profit is now divided among a larger number of shares — Ind AS 33 requires specific retrospective adjustments to prior-period EPS figures for both bonus issues and the discounted element of rights issues.
- A rights issue's proceeds, once deployed, can genuinely improve future profitability by reducing interest expense — a real, positive future P&L effect distinct from the immediate, purely mechanical EPS dilution the issue itself causes.
- A bonus issue has literally zero impact on any economic measure of company value or profitability — often described as being economically equivalent to a stock split, just executed through a different legal and accounting mechanism.
Impact on the Balance Sheet
- A rights issue increases both Cash and Share Capital plus Securities Premium by the amount raised — a genuine, two-sided balance sheet expansion.
- A bonus issue leaves TOTAL equity completely unchanged — it simply moves value from one component of equity into another, a purely internal reclassification with zero net effect on the balance sheet's overall size.
- A rights issue directly reduces a company's Debt-to-Equity ratio if the proceeds are used to pay down debt, or simply by increasing the equity base even if the cash is deployed elsewhere — a genuine, real deleveraging tool.
- Because a bonus issue increases share count without changing total equity value, book value PER SHARE falls proportionally — purely mechanical, with each shareholder's total claim on book value remaining exactly unchanged.
Which standard covers this
In India, rights issues and bonus issues are governed primarily by the Companies Act, 2013 and, for listed companies, SEBI's Issue of Capital and Disclosure Requirements (ICDR) Regulations, which set out procedural, pricing, and disclosure requirements. The accounting and EPS-adjustment mechanics specifically are governed by Ind AS 33 – Earnings Per Share, the same standard covered in the Earnings Per Share article, which mandates the specific retrospective adjustments needed to keep EPS comparisons meaningful.
How it's recognised globally
Globally, the equivalent EPS-adjustment principles sit within IAS 33, and Ind AS 33 mirrors its treatment of bonus issues and the discounted element of rights issues closely — a genuinely well-converged, largely mechanical area of accounting worldwide. What differs more by market is the surrounding CAPITAL MARKETS regulatory framework and market practice: rights issues are a considerably more common and culturally well-established capital-raising tool among Indian listed companies than among large US-listed companies, where straightforward follow-on public offerings to all investors, rather than rights-based offers specifically to existing shareholders, are the more typical route for a listed company to raise fresh primary equity capital.
Real example — Indian listed company
Reliance Industries' rights issue in 2020 remains India's largest-ever rights issue and a genuinely landmark real-world example of this concept in action. The company raised ₹53,125 crore (finalised at ₹53,124.20 crore) through a rights issue priced at ₹1,257 per share, offered in a 1:15 ratio, explicitly stated to help the company pursue its publicly-announced goal of becoming net-debt-free. The issue was oversubscribed, reflecting strong shareholder participation. This single transaction illustrates the mechanics described throughout this article at the largest possible scale in Indian markets: genuine new cash flowed into Reliance Industries' balance sheet, existing shareholders who participated maintained their proportional ownership while contributing fresh capital, and the funds raised were specifically deployed toward the company's stated deleveraging objective — a real-world instance of a rights issue being used precisely as this article describes, to strengthen a balance sheet using existing shareholders' own capital rather than through fresh borrowing or an external share sale.
Where you'll see this
Related concepts
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Return on Capital Employed (ROCE)
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