Bonus Issue

What is a Bonus Issue?

A bonus issue, otherwise called a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. A company might choose to disseminate further shares as an alternative to expanding the dividend payout. For instance, a company might give one bonus share for each five shares held.

Understanding Bonus Issues

Bonus issues are given to shareholders when companies are short of cash and shareholders anticipate a standard income. Shareholders might sell the bonus shares and meet their liquidity needs. Bonus shares may likewise be issued to rebuild company reserves. Giving bonus shares doesn't include cash flow. It increases the company's share capital however not its net assets.

Bonus shares are issued by every shareholder's stake in the company. Bonus issues don't weaken shareholders' equity, since they are issued to existing shareholders in a consistent ratio that keeps the relative equity of every shareholder equivalent to before the issue. For instance, a three-for-two bonus issue entitles every shareholder three shares for each two they hold before the issue. A shareholder with 1,000 shares gets 1,500 bonus shares (1000 x 3/2 = 1500).

Bonus shares themselves are not taxable. In any case, the stockholder might need to pay capital gains tax on the off chance that they sell them at a net gain.

For internal accounting, a bonus issue is just reclassification of reserves, with no net change in total equity, despite the fact that its structure is changed. A bonus issue is an increase in the share capital of the company alongside a lessening in different reserves.

Benefits and Disadvantages of Issuing Bonus Shares

Companies low on cash might issue bonus shares as opposed to cash dividends as a method of turning out revenue to shareholders. Since giving bonus shares increases the issued share capital of the company, the company is perceived as being greater than it truly is, making it more appealing to investors. Also, expanding the number of outstanding shares diminishes the stock price, making the stock more affordable for retail investors.

Nonetheless, giving bonus shares takes more money from the cash reserve than giving dividends does. Likewise, on the grounds that responsible bonus shares doesn't create cash for the company, it could bring about a decline in the dividends per share from here on out, which shareholders may not see well. Also, shareholders selling bonus shares to address liquidity issues lowers shareholders' percentage stake in the company, giving them less control over how the company is managed.

Stock Splits and Bonus Shares

Stock splits and bonus shares have numerous similitudes and differences. At the point when a company declares a stock split, the number of shares increases, however the investment value continues as before. Companies ordinarily declare a stock split as a method of mixing extra liquidity into shares, expanding the number of shares trading and making shares more affordable to retail investors.

At the point when a stock is split, there is no increase or reduction in the company's cash reserves. Interestingly, when a company issues bonus shares, the shares are paid for out of the cash reserves, and the reserves exhaust.

Features

• Bonus shares increase a company's share capital yet not its net assets.
• 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.