Capital Market and Securities Laws · Issue of Capital and Disclosure Requirements

Rights Issue, Bonus Issue and Preferential Issue Under SEBI ICDR

Updated 11 October 2026 · Fact-checked

A rights issue offers new shares to existing shareholders in proportion to their holding, for cash. A bonus issue gives free fully paid shares by capitalising reserves. A preferential issue allots shares to selected persons at a price set by a formula. Answer by stating the provision, applying the facts, then concluding.

Understand Rights Issue, Bonus Issue and Preferential Issue

A company can raise or restructure capital without going to the public at large. Three routes are common: rights, bonus and preferential issues. For a listed company, the Companies Act, 2013 sets the base rules and the SEBI ICDR Regulations add the detailed conditions.

A rights issue is an offer of new shares to existing shareholders, in proportion to what they already hold. They pay for the shares, so the company raises money. Shareholders may take up the shares, or renounce the right in favour of someone else where permitted. Section 23 of the Companies Act, 2013 lists a rights issue as a route open to both public and private companies.

A bonus issue is different. The company raises no money. It converts reserves into share capital and gives fully paid shares to members free. Section 63 allows this out of free reserves, the securities premium account or the capital redemption reserve account. It bars capitalising reserves created by revaluation of assets. Bonus shares cannot be issued in lieu of dividend.

A preferential issue is an allotment to a select person or group, not to all shareholders and not to the public. The company raises money, but ownership is concentrated. Because of this risk of unfair pricing or control shift, the ICDR Regulations fix the pricing formula, lock-in and shareholder approval. Under the Companies Act, this is a private placement route (Part II of the Chapter, as per section 23).

So the quick test is: who gets the shares, and do they pay? Rights: existing members, pay. Bonus: existing members, free. Preferential: chosen persons, pay.

Key rules to remember

Bonus issue: sources (section 63(1)): Free reserves, securities premium account or capital redemption reserve account; Reserves created by revaluation of assets cannot be capitalised. Bonus shares must be fully paid-up.
Bonus issue: conditions (section 63(2)): Authorised by articles + Board recommendation and general meeting authorisation + no default on fixed deposits or debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions complied with; All conditions must be met together. Employee dues include provident fund, gratuity and bonus.
Bonus shares and dividend: Bonus shares shall not be issued in lieu of dividend (section 63(3)); A company cannot pay a dividend by way of bonus shares in place of dividend.
Pending transfer (section 126): Rights shares and bonus shares are kept in abeyance where a transfer instrument is delivered but transfer is not registered; Dividend goes to the Unpaid Dividend Account unless the registered holder authorises payment to the transferee in writing.
Bonus ratio: Bonus shares to be issued = Existing shares × Bonus ratio; For 1:2 bonus, ratio is 1 new share for every 2 held, so multiply by 1/2.
Rights entitlement: Rights shares = Existing shares × Rights ratio; Total money raised = Rights shares × Issue price.
Preferential issue: approval: Special resolution of members, with the preferential allottees and pricing details in the explanatory statement; Pricing is by the ICDR formula (floor price linked to market prices of the shares). Check the exact formula and lock-in in your study material.

How to solve Rights Issue, Bonus Issue and Preferential Issue questions

Use the same four-part answer for any question on these three issues. It matches the ICSI style of provision, facts and conclusion.

1Identify the type of issue from the facts: who receives shares, and do they pay?
2State the governing provision: section 63 for bonus, section 23 for the routes open to the company, and the ICDR chapter for listed companies.
3List the conditions one by one, for example authorisation by articles, general meeting approval, no defaults, partly paid shares made fully paid.
4Test each condition against the facts in the question. Mark which are met and which are not.
5For numerical parts, compute shares issued, amount raised or reserves capitalised, using the ratio given.
6Write a clear conclusion: the issue is or is not permissible, and what the company must do to comply.

Quickest way: Who gets it, do they pay, where does it come from

When to use it: Use for short-answer or difference-type questions when you have limited time.

Write three columns in your head: Rights, Bonus, Preferential.
For each, note the allottee: existing members, existing members, selected persons.
Note the payment: paid, free, paid.
Note the source or effect: new money, capitalised reserves, new money with pricing formula.
Add one legal anchor to each: section 23, section 63, ICDR pricing rules and special resolution.

Common mistakes in Rights Issue, Bonus Issue and Preferential Issue

Saying a bonus issue raises funds for the company.
Students link every issue of shares with raising capital.
Fix: A bonus issue only converts reserves into share capital. Total net worth stays the same and no cash comes in.
Allowing bonus shares out of revaluation reserve.
Revaluation reserve looks like a normal reserve on the balance sheet.
Fix: The proviso to section 63(1) bars capitalising reserves created by revaluation of assets. Only free reserves, securities premium or capital redemption reserve qualify.
Forgetting that partly paid shares must be made fully paid before bonus.
Students memorise the defaults but skip clause (e) of section 63(2).
Fix: Always check whether any partly paid shares are outstanding on the date of allotment. They must be made fully paid.
Treating a bonus issue as a substitute for dividend.
Both reward shareholders, so they seem interchangeable.
Fix: Section 63(3) says bonus shares shall not be issued in lieu of dividend.
Confusing rights and preferential issue as both being for existing members.
Both involve paying for shares and both may involve existing shareholders.
Fix: A rights issue is proportionate to all existing members. A preferential issue targets chosen allottees and needs a special resolution and pricing compliance.
Ignoring shares whose transfer is pending.
Section 126 is a small provision and is easy to miss.
Fix: Where a transfer instrument has been delivered but not registered, rights and bonus shares for those shares are kept in abeyance.

Worked examples

Example 1

Kaveri Textiles Ltd has 40,00,000 equity shares of ₹10 each, fully paid. Its articles authorise capitalisation of reserves. It has free reserves of ₹1,20,00,000, and a revaluation reserve of ₹50,00,000. It proposes a 1:4 bonus issue (one new share for every four held). It has no defaults. Is the issue permissible, and how much reserve is capitalised?

Show the solution

Provision: section 63 allows fully paid bonus shares out of free reserves, securities premium or capital redemption reserve. Revaluation reserve cannot be capitalised.
Bonus shares = 40,00,000 × 1/4 = 10,00,000 shares.
Amount to be capitalised = 10,00,000 × ₹10 = ₹1,00,00,000.
Source check: free reserves are ₹1,20,00,000, which is more than ₹1,00,00,000. So the free reserves are enough and the revaluation reserve is not needed.
Conditions: the articles authorise it, no defaults and no partly paid shares. The Board must recommend and the general meeting must authorise the issue.

Answer: The issue is permissible if the Board recommends it and the general meeting authorises it. 10,00,000 bonus shares are issued and ₹1,00,00,000 is capitalised out of free reserves, leaving ₹20,00,000 of free reserves. The revaluation reserve must not be used.

Example 2

Distinguish a rights issue from a bonus issue. Mohan Pharma Ltd has 10,00,000 shares of ₹10 each and makes a rights issue of 1 share for every 5 held at ₹40 per share. Compute the shares issued and money raised.

Show the solution

Rights issue: new shares offered to existing members in proportion to holding, and they pay for them. Bonus issue: free fully paid shares from reserves; no money is received.
Rights shares = 10,00,000 × 1/5 = 2,00,000 shares.
Money raised = 2,00,000 × ₹40 = ₹80,00,000.
Of this, face value = 2,00,000 × ₹10 = ₹20,00,000, and premium = 2,00,000 × ₹30 = ₹60,00,000.
The premium of ₹60,00,000 goes to the securities premium account as required by section 52(1).

Answer: 2,00,000 rights shares are issued and ₹80,00,000 is raised: ₹20,00,000 to share capital and ₹60,00,000 to securities premium. A bonus issue would raise nothing.

Exam tips

For difference questions, always cover allottee, payment, source of funds, and effect on net worth.
Quote section 63(2) conditions as a list. Examiners look for each condition by name.
In numerical parts, show the ratio working first, then the amount, then the split between capital and premium.
End each answer with a clear conclusion such as permissible or not permissible, as ICSI style expects.
For preferential issue pricing and lock-in, quote exact figures from your study material, since this page does not reproduce the ICDR figures.

Practice questions from Issue of Capital and Disclosure Requirements

Rights Issue, Bonus Issue and Preferential Issue in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Rights Issue, Bonus Issue and Preferential Issue: frequently asked questions

What is the main difference between a rights issue and a bonus issue?

In a rights issue, existing shareholders pay for new shares and the company raises money. In a bonus issue, shareholders get fully paid shares free and the company capitalises its reserves instead.

Can bonus shares be issued out of revaluation reserve?

No. The proviso to section 63(1) says no bonus issue can be made by capitalising reserves created by revaluation of assets.

Who can receive shares in a preferential issue?

Only selected persons or groups identified in the special resolution. It is not offered to all members or to the public.

Can a company with defaults on debt securities issue bonus shares?

No. Section 63(2) requires that the company has not defaulted in payment of interest or principal on fixed deposits or debt securities, nor on employee statutory dues.