Unlocking Stock Market Rewards: Delving into the Fascinating Life of Bonus Issue of Shares

Learn about bonus issue of shares, a corporate action where additional shares are distributed to existing shareholders free of cost, increasing their overall holdings. Discover how this process works, its impact on the company's capital structure, potential reasons behind bonus issues, and the benefits and concerns associated with this type of equity distribution.

Bonus Issue of Shares - All You Need to Know

Introduction

A bonus issue of shares, also known as a scrip issue or capitalization issue, is a common practice by companies to reward their shareholders. It involves the issuing of additional shares to existing shareholders on a pro-rata basis, free of charge.

Mechanics of Bonus Issue

A bonus issue is made by capitalizing the company's reserve or retained earnings. The number of bonus shares issued to each shareholder is proportionate to their existing shareholding. For example, if a company announces a 1:1 bonus issue, an existing shareholder will receive one additional bonus share for every share they own.

Purpose and Benefits

Companies offer bonus issues for several reasons:

• To reward existing shareholders without affecting the company's cash reserves.
• To improve the liquidity of the company's stock by increasing the number of shares available for trading.
• To reduce the market price per share, making it more affordable for small investors and potentially attracting new shareholders.
• To signal the company's growth prospects and confidence to the market, as a bonus issue suggests that the company is capitalizing its earnings for future endeavors or expansion.

Impact and Implications

By issuing bonus shares, the company reduces its retained earnings and increases the stated capital. While the issue itself does not change a shareholder's percentage ownership in the company, it increases their total number of shares. This often leads to dilution of earnings per share since the total earnings are divided among more shares.

Taxation

From a tax perspective, a bonus issue does not incur any taxable gain for shareholders. The cost basis of the previously held shares is proportionally allocated between the original shares and the bonus shares received.

Conclusion

Bonus issues of shares help to create investor value and mark a company's progress. They are often well-received as they demonstrate the company's commitment to rewarding its shareholders and future growth. Investors should, however, assess the impact of a bonus issue on their overall portfolio before making investment decisions.

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