Paid Rights Issue vs Bonus Issue, Key Differences for Shareholders

TL;DR

• Paid rights issues and bonus issues differ in issuance method and shareholder choice.
• Paid issues require new shares to be purchased with cash, carrying the risk of dilution and market price changes, while bonus issues increase shares outstanding without changing total company value.

Definition: What are paid rights issues and bonus issues

• Paid rights issue: A company issues new shares to raise funds and sells them to investors at a set issue price. Existing shareholders commonly receive subscription rights, allowing them to participate or opt out.
• Bonus issue: A company converts capital surplus or retained earnings into capital and allocates shares to existing shareholders for free. The company adjusts its capital structure, and shareholders see an increase in share count.

Why it matters, key impacts from a shareholder perspective

1) Ownership change and dilution

• With a paid rights issue, an existing shareholder who does not subscribe or opts out will see their ownership percentage fall. Subscribing defends against dilution but requires cash.
• With a bonus issue, share count increases while each shareholder s ownership percentage typically remains the same.

2) Per-share value and market reaction

• A paid rights issue can prompt positive or negative market reactions depending on the issue price and how the company will use the funds. New share issuance causes per-share value dilution.
• A bonus issue only moves accounting capital items, so total company value does not change in principle, but the per-share price is simply divided across a larger number of shares.

Numerical example with hypothetical figures

Assumption: Hypothetical Company A, existing shares 1,000,000, market capitalization 10,000,000,000 KRW (price per share 10,000 KRW)

1) Paid rights issue example

• Assume the company issues 200,000 shares at 8,000 KRW per share to raise funds.
• Pre-issue company value (market cap) is 10,000,000,000 KRW. New funds equal 200,000 shares × 8,000 KRW = 1,600,000,000 KRW.
• If we simply add new funds to the pre-issue market cap, post-issue market cap is 11,600,000,000 KRW and total shares are 1,200,000. The theoretical price per share is 11,600,000,000 ÷ 1,200,000 ≈ 9,666 KRW.
• If existing shareholders do not participate in the subscription, their relative ownership falls; if they subscribe, they must pay cash to maintain their ownership.

2) Bonus issue example

• If the same Company A executes a 1:5 bonus issue, each existing share receives 0.2 additional shares, bringing total shares to 1,200,000.
• Assuming total company value does not change, price per share becomes 10,000,000,000 ÷ 1,200,000 ≈ 8,333 KRW.
• The aggregate value held by shareholders does not change, though the per-share price appears lower.

Common misconceptions clarified

• Misconception: "A bonus issue is free profit." Fact: Share count increases but per-share value decreases, so total value does not change in principle.
• Misconception: "A paid rights issue always causes stock price declines." Fact: Market response depends on issue price, use of funds, and company prospects. Check the issuance purpose and use plan.
• Misconception: "Subscription rights are always beneficial." Fact: Subscribing requires additional cash, so investors must consider their liquidity and expected returns.

This article is for information only and is not investment advice.