Q.Distinguish between a rights issue and a bonus issue of shares.

Both a rights issue and a bonus issue go to existing shareholders in proportion to their holding, which is exactly why the two are so easy to mix up — but one is paid for and one is free.

A rights issue and a bonus issue are frequently confused because both are offered to a company's existing equity shareholders in proportion to their existing shareholding — but the resemblance stops there, and a Secretarial Practice examiner routinely tests exactly where the two diverge.

A rights issue, governed by Section 62(1)(a) of the Companies Act, 2013, is an offer of genuinely fresh shares that the shareholder must pay for, usually at a price set below the share's prevailing market price as an incentive to subscribe. Because it is an offer, and not an automatic allotment, it is renounceable — a shareholder who does not want it may pass it on to someone else, unless the company's Articles say otherwise — and if declined within the stated notice period (15 to 30 days), it simply lapses. The whole point of a rights issue, from the company's perspective, is to bring in fresh money. …

The single most common error is treating 'proportion to existing holding' as the distinguishing feature — both issues share that feature, so it cannot be the basis of a distinction; the real distinguishing tes …