What are Bonus Shares?§
Bonus shares are additional shares granted to existing shareholders of a company at no extra cost, based on the proportion of shares they already own. This corporate action is often taken from a company’s reserves built from accumulated profits, known as retained earnings or share premium accounts. Bonus shares are also referred to as a scrip issue or capitalization issue. These shares do not generate any immediate wealth for shareholders but increase the number of shares they hold, thus diluting the share price but maintaining overall shareholder value.
Key Features of Bonus Shares§
- No Cash Transaction: Issuance of bonus shares requires no cash outflow from shareholders.
- Proportional Distribution: Bonus shares are distributed in a specified ratio (e.g., 1:4, 2:1).
- Adjusts Share Price Mechanically: The share price adjusts in direct proportion to the bonus share ratio, generally falling to account for the increased share count.
- Sign of Confidence: Bonus issues are often viewed as a sign of financial health and confidence in future profitability by company management.
Examples of Bonus Shares§
- 1:4 Bonus Issue: If a shareholder holds 4 shares, and the company declares a 1:4 bonus issue, the shareholder will receive one additional share for every four shares held, resulting in a total of 5 shares.
- 2:1 Bonus Issue: If a shareholder holds 1 share, and the company declares a 2:1 bonus issue, the shareholder will receive two additional shares for each share held, resulting in a total of 3 shares.
Frequently Asked Questions (FAQs)§
Q1: Why do companies issue bonus shares?
- Companies issue bonus shares to reward shareholders, capitalize retained earnings, and increase the liquidity of shares.
Q2: Do bonus shares affect a shareholder’s percentage ownership?
- No, bonus shares do not affect the percentage ownership of shareholders as they are allotted in a way that keeps the proportionate equity holding unchanged.
Q3: How do bonus shares affect the share price?
- The share price generally falls in proportion to the bonus ratio because the total number of shares increases while overall market capitalization remains the same.
Q4: Are bonus shares taxable?
- In many jurisdictions, the issuance of bonus shares is not a taxable event. However, tax implications on subsequent sale of these shares may vary.
Q5: How do companies view issuing bonus shares?
- Issuing bonus shares is often seen as a sign of strength, suggesting that a company has enough reserves and a positive outlook.
Related Terms§
- Shareholding: The ownership stake a shareholder has in a company.
- Scrip Issue: Another term for a bonus issue, where additional shares are issued to shareholders.
- Stock Dividend: Similar to bonus shares, except these typically represent a direct addition to a shareholder’s equity without altering the total share count route.
- Retained Earnings: Profits that the company retains for reinvestment rather than distributing as dividends.
- Share Premium Account: A reserve on a company’s balance sheet representing the amount received for shares exceeding their nominal value during issuance.
Online References§
Suggested Books for Further Studies§
- “Financial Accounting for Managers” by T.P. Ghosh
- “Financial Management” by Eugene F. Brigham and Michael C. Ehrhardt
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Accounting Basics: “Bonus Shares” Fundamentals Quiz§
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