What are bonus and rights shares?
Bonus shares (a stock dividend) mean the company gives shareholders extra shares free instead of cash. A “10% bonus” means one new share for every ten held. No new money comes into the company and none goes out; retained profit is simply moved into share capital in the books. So the company is worth the same in total; it is just cut into more pieces.
A rights issue means the company sells new shares to raise fresh money, and offers them first to existing shareholders in proportion to what they own, usually below the market price. A “1:2 rights issue” means the right to buy one new share for every two you hold. You have to pay, and if you do not do so within the set window, the chance lapses.
Say a large pizza is cut into 8 slices and 2 of them are yours. Someone cuts the pizza into 16 slices, and now you have 4. Twice the slices, but the same food: still a quarter of the pizza. Bonus shares are like that. A rights issue is when the shop says the pizza will be made bigger, but everyone must chip in; anyone who does not pay ends up with a smaller share of the bigger pizza.
Why it matters to an investor
- To avoid the “free shares” trap: after a bonus the price adjusts in proportion, so your total value stays about the same.
- To decide on a rights issue: if you do not take it up, your share of ownership shrinks, and the price adjustment can cut the value of your shares.
- To see where the money goes: with a bonus, the company keeps its cash; with a rights issue, it takes new money from investors. In both cases the reason matters.
- To keep your accounts right: when the number of shares or your cost changes, so does your cost per share, and with it your gains and losses.
Why the price adjusts
After the record date the exchange adjusts the share price, because the company is worth the same but there are more shares. For a bonus, the adjusted price ≈ old price ÷ (1 + bonus rate). Take a 10% bonus on a Tk 66 share: 66 ÷ 1.1 = Tk 60. 100 shares × 66 = Tk 6,600; 110 shares × 60 = Tk 6,600. The total is the same.
With a rights issue new money comes in, so the adjusted price is like an average of the old price and the rights price: (old shares × market price + new shares × rights price) ÷ total shares. This is called the theoretical ex-rights price. After that, the price moves with supply and demand; it does not stay at the adjusted figure.
Rules in Bangladesh (they can change)
- BSEC permission for bonus shares: under a directive in effect from 31 August 2021, BSEC consent is needed in some cases, such as in the first three years after listing, after paying less than 10% cash dividend for two years running, or for Z-category companies in certain conditions. The purpose must be expansion, modernisation or profitable reinvestment.
- Tax on the company: the Finance Act for 2019–20 introduced an extra 10% tax on companies that pay more in stock dividends than in cash in a year, to discourage holding on to cash by paying only bonus shares. Taxes like this can change with each year’s Finance Act.
- Approval for rights issues: a company needs BSEC approval for a rights issue and must set out in the prospectus why it is raising money, the price and the timetable. In some cases the right itself can be passed to someone else; the prospectus says whether that is possible.
Worked example
- Say you hold 1,000 shares at a market price of Tk 30: Tk 30,000 in all. The company offers a 1:2 rights issue at Tk 10 a share. You can buy 500 new shares for Tk 5,000.
- Adjusted price: (2 × 30 + 1 × 10) ÷ 3 ≈ Tk 23.33.
- If you take it up: 1,500 shares × 23.33 ≈ Tk 35,000, equal to your earlier Tk 30,000 plus the Tk 5,000 you paid in. If you do not: 1,000 shares × 23.33 ≈ Tk 23,330.
Result: taking up the rights did not make you a profit; it kept your position whole while you put in more money. Not taking them up, if the right cannot be passed on, cut your value on paper by about Tk 6,670. So the real question with a rights issue is not “is it cheap?” but what the company will do with the new money. The numbers are only an example.
Common mistakes
- Treating bonus shares as extra income, even though the price falls in proportion.
- Panicking when the price drops after a bonus, though the total value is about the same.
- Assuming rights shares are a bargain just because they are priced below the market.
- Missing the deadline on a rights issue and losing value without realising it.
Bonus and rights issues do not make the company’s pizza bigger by themselves; they change the slices or who owns how much. The real question is what the company does with its own money, or with your new money.