Bonus Shares are the additional shares that a company gives to its existing shareholders on the basis of the shares owned by them. Bonus Shares are issued to the shareholders without any additional cost. Bonus Shares are basically issued:
- To capitalize a part of the company’s retained earnings
- For conversion of its share premium account, or
- For distribution of treasury shares
A bonus issue is usually based upon the number of shares that shareholders already own. For example, the bonus issue may be “n shares for each x shares held”; but fractions of a share are not permitted. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Let us understand bonus shares in detail including their types, calculation, eligibility, advantages, and disadvantages.