IAS Economy Practice Question . 27

In context with the share markets, what is the difference between rights and bonus issue?
1. Bonus issues are issued free of charge, Right Issues are for a charge
2. Bonus Issue is under primary market offering, Rights issue us under secondary market offering
Choose the correct option:
[A]Only 1 is correct
[B]Only 2 is correct
[C]Both 1 & 2 are correct
[D]Both 1 & 2 are incorrect

Answer: Only 1 is correct
Bonus issues are shares issued free of charge to shareholders. When a company accumulates a large fund from profits, much beyond its needs, the directors may decide to distribute a part of it among the shareholders in the form of bonus. Once a bonus is issued, the price of the shares is likely to drop as the value of the company’s assets is now spread over a larger number of shares. Rights shares are issued to existing shareholders who have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A company can opt for a rights issue to raise capital under secondary market offering. The second statement is only imaginary and incorrect.