For stock investors, understanding the concepts of paid-in capital increase (rights issue) and bonus issue is essential.
Both methods involve issuing new shares, but their purposes and effects differ significantly.
In particular, a paid-in capital increase can impact existing shareholders through equity dilution and stock price declines.
This article will explain the differences between paid-in capital increases and bonus issues, their impact on stock prices and shareholders, and key considerations for investors.
What Is a Paid-in Capital Increase?
A paid-in capital increase (rights issue) refers to a company issuing new shares and selling them to investors to raise capital.
The funds raised can be used for business expansion, debt repayment, research and development (R&D), or improving financial stability.
Paid-in Capital Increase Process
- Board Resolution → Decision on whether to conduct a rights issue and determine the amount
- Preemptive Rights for Existing Shareholders → Existing shareholders have the first right to purchase new shares
- Decision by Shareholders → Shareholders decide whether to subscribe to new shares or sell their rights
- Public Offering → If existing shareholders do not purchase the new shares, they are offered to the public
Impact on Stock Prices
- The increase in the number of shares can cause dilution, leading to a potential drop in stock price
- Investors may interpret a rights issue as a sign of financial difficulty, negatively impacting market sentiment
- However, if the funds raised improve the company’s financial structure or drive successful business expansion, the stock price could rise in the long term
Example
Company A plans to issue 10 million new shares at $5 per share, raising $50 million.
Existing shareholders have the right to purchase shares at $5 each, but if they do not, their ownership percentage will decrease, and the stock value may be diluted.
What Is a Bonus Issue?
A bonus issue (stock dividend) occurs when a company issues additional shares to existing shareholders for free.
This is typically done using capital reserves without affecting the company’s overall value.
Bonus Issue Process
- The company issues new shares using its capital reserves
- Existing shareholders receive additional shares at a predetermined ratio (e.g., 1 additional share for every 1 share held)
- Stock price is adjusted accordingly as the total number of shares increases
Impact on Stock Prices
- Since the total number of shares increases, the stock price will decrease proportionally
- However, because shareholders’ ownership percentage remains unchanged, there is no dilution effect
- The lower stock price can increase trading volume and attract more investors
Example
If Company A announces a 1:1 bonus issue, a shareholder holding 100 shares will receive an additional 100 shares for free.
However, the stock price will be adjusted to half its previous value due to the doubled number of shares.
Comparison: Paid-in Capital Increase vs. Bonus Issue
| Category | Paid-in Capital Increase | Bonus Issue |
|---|---|---|
| New Share Issuance | Sold to investors for funding | Distributed free to existing shareholders |
| Purpose | Capital raising (expansion, debt repayment) | Adjust stock price, increase liquidity |
| Burden on Shareholders | Ownership dilution if shares are not purchased | No financial burden |
| Impact on Stock Price | Dilution may lead to a price drop | Price decreases but ownership remains unchanged |
| Effect on Shareholders | Additional investment required | Free shares with no dilution |
While a bonus issue does not negatively impact existing shareholders, a paid-in capital increase can dilute ownership if shares are not purchased.
Can a Company Conduct a Paid-in Capital Increase at Its Discretion?
Companies cannot unilaterally conduct a paid-in capital increase.
Since it significantly affects shareholders and stock structure, it must follow legal procedures.
Legal Process of a Paid-in Capital Increase
- Board Resolution → Approval of the rights issue plan
- Shareholder Meeting Approval (If Required) → Shareholder consent is needed if preemptive rights are restricted
- Regulatory Filing & Disclosure → Submission of reports to financial authorities
- Subscription & Issuance → Existing shareholders decide whether to buy shares, and remaining shares are offered to the public
Thus, paid-in capital increases require legal compliance and shareholder protection.
Impact of a Paid-in Capital Increase on Shareholders
Potential Risks for Existing Shareholders
- Equity Dilution → Ownership percentage decreases if new shares are not purchased
- Stock Price Drop → The increased share count may reduce stock value
- Discounted Share Price Risk → Rights issues are often priced below the market value, causing additional price pressure
Options for Existing Shareholders
✔ Exercise Rights → Buy new shares to maintain ownership percentage
✔ Sell Subscription Rights → If unwilling to buy new shares, rights can be sold for cash
✔ Do Nothing → Accept a reduced ownership percentage
Conclusion
A paid-in capital increase and a bonus issue both involve issuing new shares, but their effects on shareholders differ significantly.
✔ Bonus issues are generally favorable to shareholders, as they provide free shares and increase liquidity.
✔ Paid-in capital increases help companies raise funds but can lead to equity dilution and stock price declines if not carefully managed.
✔ Investors should carefully assess their options when a rights issue is announced to make an informed decision.
When a company announces a paid-in capital increase, shareholders should carefully consider whether to buy new shares, sell their rights, or accept ownership dilution.
On the other hand, bonus issues are generally seen as neutral or positive for shareholders.
Understanding the differences between paid-in capital increases and bonus issues is essential for making informed investment decisions.