Bonus Shares
1.Introduction
Good Morning everyone today I… and my group members………. Are here to present a
discussion on the topic Bonus Shares. A bonus issue, also known as a scrip issue or a
capitalization issue, is an offer of free additional shares to existing shareholders. A company
may decide to distribute further shares as an alternative to increasing the dividend payout.
These are company's accumulated earnings which are not given out in the form of dividends,
but are converted into free shares.
2.Features of Bonus Issues
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A bonus issue of shares is stock issued by a company in lieu of cash dividends. Shareholders
can sell the shares to meet their liquidity needs.
Bonus shares increase a company's share capital but not its net assets.
Bonus shares themselves are not taxable. But the stockholder may have to pay capital gains
tax if he/she sells them at a net gain.
For internal accounting, a bonus issue is simply reclassification of reserves, with no net
change in total equity, although its composition is changed.
A bonus issue is an increase in the share capital of the company along with a decrease in
other reserves.
3.Calculation of Bonus Shares
The bonus shares are given to the existing shareholders according to their existing stake in the
company. Like for example, a company declaring one for two bonus shares would mean that
an existing shareholder would get one bonus share of the company for every two shares held.
Suppose a shareholder holds 1,000 shares of the company. Now when the company issues
bonus shares, he will receive 500 bonus shares (1,000 *1/2 = 500).
Another example- a three-for-two bonus issue entitles each shareholder three shares for every
two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares
(1000 x 3 / 2 = 1500).
4.Types of Bonus Shares
(A) Fully Paid Bonus Shares:
When bonus shares are distributed free of cost in proportion of holding, it is called Fully Paid
Bonus Shares. Fully paid-up bonus shares can be issued out of following sources:
(i) Capital redemption reserve
(ii) Security premium** (realised in cash)
(iii) Capital reserve* (realised in cash)
(iv) Profit and loss account
(v) General reserve
(vi) Investment allowance reserve
(vii) Sinking fund for redemption of debentures (after redemption)
(viii) Development rebate reserve.
*Capital reserve not realized in cash cannot be utilized for issuing bonus shares e.g. capital
reserve created by revaluation of fixed assets.
** Security premium not realized in cash cannot be utilized for issuing bonus shares.
(B) Partly Paid Bonus Shares:
When bonus is applied for converting partly paid shares into fully paid shares, it is called Partly
Paid-up Bonus Shares. Partly paid-up bonus shares can be issued from the following sources:
(i) Capital Reserve* (realized in cash)
(ii) Profit and loss account
(iii) General reserve
(iv) Investment allowance reserve
(v) Development rebate reserve
(vi) Sinking fund for redemption of debentures (after redemption)
Note:
1. Security premium account and capital redemption reserve account cannot be utilized for
issuing partly paid bonus shares.
2. If a choice is to be made between revenue reserves and capital reserves; the capital reserves
are normally utilized first as far as legally permissible.
5.Reasons for issuing Bonus Shares
Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders
due to shortage of funds in spite of earning good profits for that quarter. In such a situation, the
company issues bonus shares to its existing shareholders instead of paying dividend. These
shares are given to the current shareholders on the basis of their existing holding in the
company. Issuing bonus shares to the existing shareholders is also called capitalization of
profits because it is given out of the profits or reserves of the company.
6.Record Date
When the company issues bonus shares, the term “record date” is used along with it. Record
date is a cut-off date set by the company. If you are the owner of the shares of the company on
this cut-off date then you are eligible to receive the bonus shares. The record date is set by the
company so that they can find the eligible shareholders and distribute bonus shares to them.
7.Advantages of issuing Bonus Shares
Companies low on cash may issue bonus shares rather than cash dividends as a method of
providing income to shareholders. Because issuing bonus shares increases the issued share
capital of the company, the company is perceived as being bigger than it really is, making it
more attractive to investors. In addition, increasing the number of outstanding shares decreases
the stock price, making the stock more affordable for retail investors.
8.Disadvantages of issuing Bonus Shares
Issuing bonus shares takes more money from the cash reserve than issuing dividends does.
Also, because issuing bonus shares does not generate cash for the company, it could result in a
decline in the dividends per share in the future, which shareholders may not view favorably. In
addition, shareholders selling bonus shares to meet liquidity needs lowers shareholders'
percentage stake in the company, giving them less control over how the company is managed.
9.Conditions for issue of Bonus Shares
i. The issue of bonus shares must be authorized by the Articles of the company.
ii. The issue of bonus shares must be recommended by the resolution of the Board of
Directors. Also, this recommendation must be later approved by the shareholders of the
company in the general meeting.
iii. The Controller of Capital Issues must give permission to the issue.
10.Stock Split and Bonus Shares
Stock split and Bonus Shares are often confused with one another. A stock split is when a
company divides the existing shares of its stock into multiple new shares to boost the stock's
liquidity.
Stock Split and bonus shares have many similarities and differences. When a company declares
a stock split, the number of shares increases, but the investment value remains the same.
Companies typically declare a stock split as a method of infusing additional liquidity into
shares, increasing the number of shares trading and making shares more affordable to retail
investors.
When a stock is split, there is no increase or decrease in the company's cash reserves. In
contrast, when a company issues bonus shares, the shares are paid for out of the cash reserves,
and the reserves deplete.