A bonus share, also known as a scrip issue or capitalization issue, is a free additional share given to existing shareholders in proportion to their current holdings. Instead of paying dividends in cash, the company issues additional shares. This process does not involve any new capital from shareholders; it merely capitalizes a portion of the company's retained earnings or reserves, converting them into share capital.
Key Characteristics of Bonus Shares:
Proportional Allocation:
Bonus shares are allotted to existing shareholders based on a specific ratio (e.g., 1 bonus share for every 2 existing shares).
No Additional Cost:
Shareholders do not pay any extra money for the bonus shares. They receive them for free, proportionate to their current shareholding.
The issuance of bonus shares involves converting the company's reserves (such as retained earnings, share premium account, or capital redemption reserve) into share capital.
The total share capital of the company increases, but the overall value of the shareholders' investment remains the same because the market price of the shares typically adjusts downward to reflect the increased number of shares.
The increase in the number of shares can improve the liquidity of the company's shares in the stock market, making it easier for shareholders to buy and sell.
Capitalization of Reserves:
Increase in Share Capital:
Enhanced Liquidity:
Example If a shareholder owns 100 shares of a company, and the company declares a 1:1 bonus issue, the shareholder will receive an additional 100 shares, resulting in a total holding of 200 shares. However, the market price of each share may be adjusted accordingly to reflect the increased number of shares in circulation.
Purpose of Issuing Bonus Shares
Reward Shareholders:
Bonus shares serve as a reward to shareholders by giving them additional shares without cost, effectively increasing their investment.
Signal of Confidence:
Issuing bonus shares can signal the company's confidence in its future profitability and financial stability.
By increasing the number of shares outstanding, the company can enhance the marketability and trading volume of its shares.
For shareholders, receiving bonus shares can be more tax-efficient compared to receiving cash dividends, depending on the tax regulations in their jurisdiction.
Improving Market Liquidity:
Tax Efficiency:
In summary, bonus shares are an effective way for companies to reward shareholders, increase the equity base, and improve stock liquidity without affecting the shareholders' proportionate ownership.
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