The Essentials of Bonus Issues: Rewarding Shareholders with Free Shares

Key Takeaways:

1. Bonus issues are a way for companies to reward their existing shareholders without distributing cash dividends.

2. The number of bonus shares received by a shareholder is directly proportional to the number of existing shares they hold.

3. Companies utilize free reserves, built from genuine profits, to make bonus issues as an alternative to cash dividends.

4. Restrictions exist on offering bonus issues, such as companies being unable to do so if they have defaulted on debt payments.

5. While the shareholders’ proportionate ownership remains unchanged, the number of shares held by them increases, providing a potential increase in the total value of their shareholding.

Bonus Issue: 5 Things to Know

A bonus issue, also known as a scrip issue or capitalization issue, is a corporate action where a company issues additional shares to its existing shareholders without any payment from them. Here are five key points to understand about bonus issues:

1. Issued to Existing Shareholders for Free: Bonus shares are issued to existing shareholders by the company without any payment from them. This is a way for the company to reward its shareholders without distributing cash dividends.

2. Proportional to Existing Shares Held:

The number of bonus shares that a shareholder receives is directly proportional to the number of existing shares they hold. For example, a bonus issue in a 1:3 ratio entitles a shareholder to receive one bonus share for every three shares held.

3. Utilization of Free Reserves:

The company makes the bonus issue out of its free reserves, which are built from genuine profits. Bonus issues are an alternate way for companies to reward shareholders and utilize their accumulated profits.

4. Restrictions on Bonus Issue:

A company cannot offer a bonus issue if it has defaulted on payment of interest and/or principal on any debt security issued or any fixed deposit raised. This restriction ensures that companies maintain financial discipline before issuing bonus shares.

5. Unchanged Proportionate Ownership:

When a bonus issue is made, the shareholders’ proportionate ownership in the company remains unchanged. However, the number of shares held by them increases. This means that while the total value of their shareholding increases, their proportional ownership stake in the company remains the same.

FAQ:

Q1: How are bonus shares allocated to existing shareholders?

A1: Bonus shares are allocated to existing shareholders in proportion to the number of shares they already hold. For example, a 1:3 bonus issue entitles a shareholder to receive one bonus share for every three shares held.

Q2: What are the restrictions on offering bonus issues?

A2: Companies cannot offer bonus issues if they have defaulted on payment of interest and/or principal on any debt security issued or any fixed deposit raised.

Q3: Do bonus issues impact shareholders’ ownership in the company?

A3: While the number of shares held by shareholders increases with a bonus issue, their proportionate ownership in the company remains unchanged.