Bonus Shares

Bonus Shares are issued by a company when it is not able to pay the dividend to its shareholders because of shortage of funds in spite of earning good profits for that particular quarter. In such a case, the company issues bonus shares to its existing shareholders instead of paying dividends. These shares are issued 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.

As mentioned above, bonus shares are given to existing shareholders according to their stake in the company. 

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 2,000 shares of the company, now when the company issues bonus shares, he will receive 1,000 bonus shares (2,000*½= 1,000).

All the existing shareholders of the company, at the time of bonus issue, are eligible to receive bonus shares. Once the company announces a bonus issue, it also announces the date (record date) when the issue is to take place. All the investors who are shareholders of the company on the record date will be issued bonus shares. Once the bonus shares have been issued on the record date, they are known as ex-bonus.

Record date is a cut-off date that is set by the company. All the existing owners of the shares of the company on this cut-off date known as the record date will be eligible to receive the bonus shares. The record date is set up by the company so that they can find the eligible shareholders and distribute bonus shares to them.

There are mainly two types of bonus shares as following:

Following listed are the conditions required for issue of bonus shares:

• The issue of bonus shares must be authorized by the Articles of the company
• 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
• The Controller of Capital Issues must give permission to the issue

What do you mean by bonus share?

A bonus issue is an offer given to the existing shareholders of the company to subscribe for additional shares. Instead of increasing the dividend payout, the companies offer to distribute additional shares to the shareholders.

Are bonus shares good?

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.

What happens after bonus shares?

When the bonus shares are issued, the number of shares the shareholder holds will increase, but an investment’s overall value will remain the same.

Why do companies give bonus shares?

Companies issue bonus shares to encourage retail participation and increase their equity base. When the price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. An increase in the number of shares reduces the price per share.

Which is better-  bonus or dividend?

Similarly for the investors also, the issue of bonus shares is much better.  A company has to pay dividend distribution tax on the issue of dividends whereas no such tax is to be paid by the company on bonuses since they are treated as an issue of new shares.