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Rights Offerings, Bonus Issues, and Capital Reductions Explained

Three events that change a company's capital β€” work through them in order to see what sets each one apart.

  1. What Is a Rights Offering?

    A company raises money by issuing new shares and selling them to investors for cash. Depending on who gets first access, it can be offered to existing shareholders ("rights issue"), to the general public ("public offering"), or to a specific investor such as a strategic partner or major shareholder ("private placement"). It raises money without taking on debt, but it also increases the share count, which dilutes existing shareholders' ownership percentage.

  2. How a Rights Offering Affects the Share Price

    New shares are usually priced at a discount to the market price, so on the ex-rights date the stock is technically adjusted downward and per-share value can be diluted. Because the total share count rises while overall company value stays roughly the same, earnings per share (EPS) tends to fall unless the capital raised is put to productive use. Whether the raise ends up being good news for shareholders long-term depends heavily on what the money is actually used for.

  3. What Is a Bonus Issue?

    A company moves money from its retained earnings or capital reserves into its share capital account, and distributes new shares to existing shareholders free of charge in proportion to what they already hold. A "1-for-1 bonus issue," for example, turns 10 shares into 20. No new money comes in from outside β€” it is purely an internal accounting shift from reserves to capital β€” so the company's actual financial position and value do not change.

  4. The Bonus Issue Price Illusion

    Because the reference price is lowered on the ex-rights date to reflect the larger share count, a bonus issue can look like a company suddenly got "cheaper," and it is often read as a positive signal that management is confident enough in earnings to release reserves β€” which can push the price up in the short term. But the pie has been cut into more slices, not made bigger, so a lower reference price alone does not mean the company is actually worth more. Note that a bonus issue differs from a stock split, which only divides the par value and leaves total share capital unchanged even though both increase the share count.

  5. What Is a Capital Reduction?

    A company shrinks its capital base by reducing its share count or par value, and reductions split into two types depending on whether shareholders are paid. A paid (or "compensated") reduction returns cash to shareholders in exchange for some of their shares, often used to return surplus cash when a company has more than it needs. An unpaid (or "uncompensated") reduction cancels shares with no payment at all, typically used to offset accumulated losses against capital and clean up a balance sheet that shows capital impairment.

  6. Why an Unpaid Capital Reduction Is a Red Flag

    In a "2-for-1" unpaid reduction, for example, a shareholder holding 10 shares is left with 5, and the other 5 are simply cancelled with no compensation. It can improve the company's books by writing off accumulated losses, but shareholders absorb the full loss in the value of their holdings with nothing in return. Companies facing a risk of being flagged for financial distress or delisting often resort to an unpaid capital reduction to clean up capital impairment, so if you see one announced, checking the company's underlying financial health is essential before making any decision.

One Way to Keep the Three Straight

A rights offering brings new money into the company. A bonus issue moves money the company already has from one internal account to another. A capital reduction shrinks the capital base itself. Note especially that a bonus issue and a capital reduction move in opposite directions β€” one increases share count, the other decreases it.

Don't Confuse a Bonus Issue With a Stock Split

A bonus issue genuinely increases total share capital, while a stock split only divides the par value β€” total share capital and company value are completely unchanged. Both increase the number of shares outstanding, but they mean different things on the books.

Frequently Asked Questions

Do I lose money if I skip a rights offering I'm eligible for?

In some cases you can sell your subscription rights on the market to offset part of the dilution, but if you miss the window to sell those rights, they simply expire worthless and you are left with no compensation for the dilution. When a rights offering is announced, it is worth checking the deadline to sell your rights well in advance.

Why does the share price get adjusted down on a bonus issue's ex-rights date?

Because the number of shares outstanding increases, leaving the old price unchanged would make the company's total market value look like it jumped overnight for no reason. To prevent that illusion, exchanges lower the reference price on the ex-rights date in proportion to the size of the bonus issue.