Introduction:
A bonus issue, also known as a scrip issue or a capitalization issue, is the allocation of free shares to existing shareholders. Let’s take an example: A firm, may offer one bonus share for every five shares held. Companies issue bonus shares to encourage more investment and to reward owners.
They serve the purpose of rewarding existing shareholders and are strongly related to a company’s financial performance and ability to make profits.
Throughout this article, we will look at the concept of bonus shares, how they work, and some examples of bonus shares granted by Indian firms in the past.
What Bonus Share means?
Bonus shares are additional shares granted to existing shareholders as a “BONUS” with out taking any of the other charges means, free of cost. The existing shareholders do not have to pay anything to acquire these additional shares.
Only an entity has the authority to issue bonus shares to its shareholders if it has made a substantial profit or has large free reserves that cannot be used for.
These bonus shares, however, are distributed to shareholders in proportion to their existing ownership in the company.
Indian Companies that issued Bonus shares:
- Infosys
- Reliance Industries
- Tata Motors
- HDFC Bank.
When a company declares bonus shares?
Bonus shares are issued by companies to reward their loyal and existing shareholders. When an entity issues bonus shares, it effectively doubles the number of shares in circulation without raising any market capital. The share price is diluted as a result, but each shareholder’s ownership in the company stays unchanged. In other words, it’s the same as slicing a pie into numerous pieces, yet each piece still represents the same part of the entire pie.
Bonus shares tend to be allocated in a predetermined ratio to current shareholders. For example, a company may issue of bonus shares at a 1:1 ratio, meaning that for every existing share held, the shareholder will receive one additional bonus share. The ratio is subject to change and is determined by the company’s board of directors.
What are the reasons behind that companies are issuing the bonus shares?
Companies usually offer bonus shares for a variety of reasons. First, they reduce the price per share and increase liquidity to promote greater retail investor engagement in their stock. Second, they offer an option to paying out dividends to reward investors. Ultimately, they demonstrate that the organisation is financially strong enough to continue developing and creating shareholder value.
Now we are having look on the benefits of issuing bonus shares, we will go through these factors in further detail.
- Capitalization of Profits:
One of the main reasons for granting issues of bonus shares is to profit from the company’s success. Instead of paying out dividends to shareholders, the company declares to converts these gains into extra shares. This increases the capital basis of the organisation, which can be useful for future growth and expansion.
- Increase Liquidity:
Bonus issues can improve the liquidity of a company’s stock by the number of shares increases. This may make the stock more appealing to investors.
- Giving Rewards to existing shareholders:
Companies can reward their existing shareholders, who hold shares in the company by issuing bonus shares, which are free cost . It demonstrates trust in the company’s financial health and future growth possibilities.
- Enjoying the Tax Benefits:
In a few cases, bonus shares can provide tax advantages to investors over cash dividends. However, tax consequences can differ, therefore it’s critical to contact with a tax professional.
The Bottomline:
A bonus issue of shares occurs when a business allocates additional shares to shareholders from earnings or existing reserves. Due to the stock price changes correspondingly to the additional shares issued, a bonus issue raises a company’s outstanding shares but not its market capitalization, even though it helps the company into long term run. Companies use bonus issues largely to attract retail investors, give an alternative to dividends, and/or project a strong financial position.
At the other hand, earnings set aside for incentive concerns may result in missed opportunities to increase shareholder value. Whereas investors are not taxed directly when a corporation issues bonus shares, capital gains tax occurs if the shares are sold for a profit.
Mostly Asked Questions:
- When company issues bonus shares, what happens?
A bonus issue is a stock dividend distributed by a company to reward its shareholders. Regular dividends are paid out in cash to shareholders, but in a bonus issue, stocks are distributed instead of cash.
- What are the two conditions needed for the issuing of bonus shares?
The issuance of bonus shares must be recommended by a Board of Directors resolution. This recommendation must also be adopted by the company’s shareholders in a public meeting. The issue must be approved by the Controller of Capital Issues.
- Can I sell bonus shares right away?
Bonus shares are immediately credited with a fresh face value. In the case of a bonus issue, however, the shares are credited a few days (often 15 days) following the ex-date. As a result, the investor cannot sell the share before it is deposited to your Demat account, as this may result in an auction.
