What Is a Bonus Issue and How Does It Work?

A bonus issue is essentially a distribution of additional shares to existing shareholders, allowing them to own more of the company without having to pay for the new shares.

This can be a strategic move by the company to increase shareholder value or to reduce the outstanding shares.

Bonus issues are typically offered to shareholders on a pro-rata basis, meaning each shareholder receives the same proportion of new shares as they do of the existing shares.

This means that if you own 10% of the company's shares, you'll receive 10% of the new shares issued.

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A bonus issue is when existing shareholders get extra shares in a certain proportion. For example, if a 4:1 bonus issue is announced, shareholders will receive four shares for every one share they hold.

The number of shares held by a shareholder is what a bonus issue is based on. Zero cash payments ensure that the position of liquidity remains unchanged.

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The dividend per share drops since there is an increase in the total number of shares as a result of a bonus issue. This does not directly affect the value or capital of the company overall.

Unlike in the case of Rights Issues, this does not dilute the shareholder's investment. The value of the investment remains unaltered because, even though there is a decrease in the income per share, the shareholder owns a larger number of shares.

Here are the key differences between a bonus issue and a stock split:

A bonus issue is an assurance that the company will be able to service its larger equity. This means that the company would not have issued bonus shares if it could not guarantee an increase in profits from the shares and a distribution of dividends in the future.

Companies issue bonus shares following the constant ratio formula that allows a fixed number of shares to each shareholder based on the number of outstanding shares.

Let's say you hold 200 shares of company XYZ. Now, the company issued bonus shares at the ratio of 4:1, which means four bonus shares for each share you have. Accordingly, you become entitled to 800 bonus shares for the 200 shares you have.

The total value of your investment in the company remains the same. For example, assume the earlier share price was ₹20 per share; thus, your investment was worth ₹4,000. Then, although you own 1,000 shares instead of 200, the share price has dropped to ₹4 per share and your investment's total value is still ₹4,000.

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A bonus issue is a way for companies to distribute extra shares to their shareholders without requiring any additional money from them. This is done to rearrange the company's capital reserves without disturbing its liquidity.

The process begins with the company checking if it has enough profits or share premium in its financial reserves to transfer into share capital. The board of directors then suggests the issuance and chooses the ratio of bonus shares to be given, which is then presented for approval by shareholders at a general meeting.

Bonus shares are distributed in a fixed ratio to the shareholders, and the company registers the bonus issue with governing bodies. New shares are then put in eligible shareholders' accounts as per ownership records on a particular date.

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A bonus issue is a way for companies to give extra shares to their shareholders without needing any more money from them. This is a corporate benefit that increases the number of shares held by shareholders.

The company needs to check if it has enough money saved up as profits or share premium in its financial reserves to transfer into share capital. This is a crucial step before issuing bonus shares.

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The board of directors suggests the issuance and chooses what ratio of bonus shares will be given, then it's presented for approval by shareholders at a general meeting. This ensures that the bonus issue is fair and transparent.

Bonus shares are distributed in a fixed ratio to the shareholders, which means each shareholder gets a certain number of new shares based on their existing shareholding. This is done to ensure that everyone gets their fair share.

A company can only issue bonus shares if it has enough money in its financial reserves, and the board of directors needs to approve the issuance first. This is to prevent any potential financial risks to the company.

The bonus issue gets registered with governing bodies and new shares are put in eligible shareholders' accounts as per ownership records on a particular date. This process is to make sure shares are divided fairly and equally among shareholders.

Bonus shares are allocated to existing shareholders based on their current holdings in the company. This means the number of bonus shares they receive is directly proportional to the number of shares they already own.

For a "one-for-two" bonus share issue, a shareholder will receive one additional share for every two shares they already own. This is a common type of bonus share issue.

If an investor possesses 1,000 shares, the bonus share allocation would be calculated as follows: 1,000 * ½ = 500 bonus shares.

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Partially paid bonus shares are a type of bonus share that requires further payment from shareholders to fully own the shares.

The company issues bonus shares to its shareholders, but they are still required to make further payments to fully own these shares. This additional payment is usually communicated by the company along with the issuance.

The additional payment needed to fully pay for these bonus shares can be a significant financial burden for shareholders. It's essential for investors to understand the terms and conditions associated with bonus share issues, particularly in the case of partially paid bonus shares, to avoid any misunderstandings or financial implications.

Companies issue bonus shares for a variety of strategic and financial purposes. They can reward shareholders while keeping the company's cash safe, ensuring there is enough liquidity for daily operations or upcoming investments.

Bonus shares can increase accessibility, lowering the price per share and drawing in a wider spectrum of investors. This matches with long-term strategic objectives, motivating shareholders to continue investing and promoting a steady investor foundation.

Companies may issue bonus shares to lower the current price per share, promoting liquidity for its shares in the secondary market, improving retail investor participation, or as an alternative to dividend payments to shareholders.

Bonus shares offer many benefits to companies, such as keeping cash resources and increasing shareholder equity. They convert retained earnings into share capital, improving the balance sheet and borrowing capacity of a company.

Here are some reasons why companies issue bonus shares:

By issuing bonus shares, companies demonstrate confidence in their future, which can increase the performance of their stocks. This can make company ownership more equalitarian, as it becomes easier for small investors to get hold of stocks.

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A bonus issue can be a great way for companies to reward their shareholders, improve their financial situation, and support strategic expansion without using up all their available cash. It's a good choice for achieving long-term success.

Companies can benefit from a bonus issue by keeping their cash resources and increasing their shareholder equity. This is especially useful during times of economic unpredictability or when preparing for large-scale growth. By issuing extra shares, companies can convert retained earnings into share capital, improving their balance sheet and borrowing capacity.

However, bonus shares have their own limitations. One main worry is about the lessening of earnings per share (EPS). When the quantity of existing shares increases without an immediate growth in profit, the EPS goes down. This might worry investors who give importance to the growth in earnings as a sign of how well the company will do in future.

Issuing bonus shares also brings considerable administrative expenses. This includes costs like legal support, regulatory papers, and money for updating company records as well as communicating with shareholders. Although not too high, these costs may push on the financial strength of the firm, especially when big amounts are given out in bonuses.

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Here are some key points to consider:

* Benefits to Companies:

+ Keep cash resources and increase shareholder equity

+ Convert retained earnings into share capital

+ Improve balance sheet and borrowing capacity

+ Enhance financial flexibility

* Drawbacks to Companies:

+ Lessening of earnings per share (EPS)

+ Administrative expenses

+ Potential for misunderstanding about company's financial state

* Benefits to Shareholders:

+ Increase total holding without extra investment

+ Improve market liquidity

+ Potential tax advantages

* Drawbacks to Shareholders:

+ No immediate financial benefit like dividends

+ Potential for decreased income per share

+ Administrative expenses may affect company's financial strength

Receiving bonus shares typically doesn't trigger an immediate tax liability, but tax consequences come into play upon their sale.

The cost basis of the original shares is averaged with the bonus shares, affecting the capital gains tax calculation. This adjustment impacts the capital gains tax owed when the shares are sold, depending on the sale price and holding period.

Tax regulations vary by country, and in some jurisdictions, receiving bonus shares doesn't create a tax event, but the lowered cost basis could lead to higher capital gains taxes later.

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The holding period of bonus shares often aligns with that of the original shares, influencing whether the gains are classified as short-term or long-term, which can significantly affect the tax rate applied.

Bonus share issues are generally not taxed as a dividend, even if they are charged to retained earnings. However, there may be capital gains or profit on sale implications on the subsequent sale of these shares.

The cost base of bonus shares is usually zero, but if the bonus issue is taxable as a dividend, then the cost base is generally the taxed dividend amount, plus any calls on partly paid bonus shares. The acquisition date is the date of issue.

To be eligible for bonus shares, you need to own company shares on the record date. The record date is when the company checks its records to identify eligible shareholders.

You should be aware of two important dates: the record date and the ex-date. The ex-date is generally one or two trading days before the record date, depending on the settlement cycle.

To receive the bonus shares, you must purchase the company's shares by the ex-date, which is usually one or two trading days before the record date. This ensures you appear as a registered shareholder in the company's records by the record date.

In India, the ex-date is two days ahead of the record date, following the T+2 rolling system for share delivery. This means you must buy the shares at least two days before the record date to be eligible for the bonus shares.

Once you're a registered shareholder, you'll be credited with the bonus shares within fifteen days of the new ISIN being allotted.

Bonus shares can be classified into two main types: fully paid bonus shares and partially paid bonus shares. Fully paid bonus shares are given to shareholders at no extra cost based on their existing holdings in the company.

These shares are issued from sources such as the profit and loss account, capital reserves, capital redemption reserves, and security premium account. The shareholding pattern remains unchanged as shares are distributed on a pro-rata basis.

Bonus shares can only be issued after a minimum period of 12 months from the last issue and a maximum of two bonus issues is allowed within a five-year period.

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Bonus shares can be classified into two main types: fully paid bonus shares and partially paid bonus shares. A fully paid bonus share is given to shareholders at no extra cost based on their existing holdings in the company.

Fully paid bonus shares are issued from sources such as the profit and loss account, capital reserves, capital redemption reserves, or the security premium account. These shares are a great way for companies to reward their shareholders without asking for any additional payment.

Partially paid bonus shares, on the other hand, are issued when a company converts partly paid shares into fully paid shares without asking for the unpaid amount. This process is done by capitalising profits, and it's a way for companies to issue bonus shares even if they don't have enough funds in their capital redemption reserve account or security premium account.

Here's a breakdown of the two types of bonus shares:

Bonus shares can only be issued after a minimum period of 12 months from the last issue. This rule ensures that companies don't abuse the system by issuing bonus shares too frequently.

The shareholding pattern remains unchanged as shares are distributed on a pro-rata basis. This means that existing shareholders keep their same percentage of ownership, but the overall number of shares increases.

The increase in the number of outstanding shares improves stock liquidity. This is a big plus for investors who want to buy or sell shares quickly.

Here are some key features of bonus shares:

Bonus shares can be a great way to boost the company's reputation in the market. By showing that they care about their shareholders, companies can build trust and loyalty.

Companies are limited to a maximum of two bonus issues within a five-year period. This rule helps prevent companies from overusing the bonus share system.