A bonus issue, also known as a scrip or capitalization issue, is a corporate activity in which a business gives new shares to current shareholders for free. Unlike a stock split, which raises the number of shares proportionally while decreasing the price per share, a bonus issue has no impact on the company’s overall market capitalization or shareholders’ equity. Instead, it returns the company’s retained earnings or reserves to existing owners.
How Bonus Issues Work
- Declaration: The company’s board of directors declares a bonus issue, detailing how many additional shares will be awarded for each share held. For example, a 1-for-1 bonus issue would provide one more share for every existing share held.
- Record Date: The corporation establishes a record date, also known as the bonus issue date, to identify which shareholders are qualified to receive bonus shares. The incentive is payable to shareholders who are enrolled in the company’s books as of this date.
- Distribution: On the bonus issue date, the corporation distributes more shares to eligible shareholders. These shares are often credited straight to shareholders’ accounts, without the need for extra payment.
Reasons for Bonus Issues
- Rewarding Shareholders: Bonus offerings are frequently utilized to compensate current shareholders while preserving the company’s financial reserves. By issuing bonus shares, the corporation increases shareholder value and shows confidence in its future prospects.
- Improving Liquidity: By increasing the number of outstanding shares through a bonus issue, the company’s stock becomes more liquid and appealing to investors.
- Conserving Cash: Unlike cash dividends, which oblige the corporation to pay cash to shareholders, bonus issues allow the company to keep funds for future expenditures or expansion plans.
Impact on Investors
- Dilution: Bonus issues increase the number of shares held by investors but do not affect the company’s proportional ownership. As a result, ownership is not diluted.
- Capital Gains: If the market price of the stock rises as a result of the announcement or distribution of bonus shares, shareholders may benefit financially.
- Tax Implications: In most jurisdictions, bonus shares are not taxed until sold. However, investors should seek advice from tax professionals to understand the unique tax implications in their jurisdiction.
Conclusion:
Bonus issues are a popular strategy for corporations to reward shareholders, increase liquidity, and save money. Companies can boost shareholder value and demonstrate confidence in their future growth prospects by issuing extra shares at no cost. Bonus issues provide investors with the opportunity for financial gains and increased liquidity, but they do not affect the company’s underlying worth.
