Bonus Shares are additional shares that are given by the company to its existing shareholders. Issue of bonus shares is a way for the company to maintain the shares at a cheaper rate without splitting the stocks. When a company declares that it will give bonus shares to its stakeholders, it gives a certain number of shares in a particular ratio to the number of shares that the stakeholders are holding. For example, if the company announces a bonus issue of 1:1, it means that you will be given 1 share for each share you hold. Similarly, if the company declares the ration of 1:2, it means that you will be given 2 shares for each share that you hold.
When the companies earn profit in their business, they distribute little profit as cash dividend to its shareholders and retain back larger part of the profit to increase their capital base. The retained profit is used as bonus shares that are issued to the stakeholders. In this way, the company is able to increase their capital-base.
Bonus shares do not affect the balance sheet of the company. They do not have any effect on the assets of the company. It is true that the liability side shows little decrease in reserves but it also increases the capital base of a company.
Bonus shares help you increase the number of shares in your portfolio without investing any more money. Through this, you are able to achieve one of your primary goals which are to increase the number of shares in your portfolio. This will earn you more profits.
Purpose of Issuing Bonus Shares
The purpose of a company in issuing bonus shares is to reward or acknowledge the shareholders for being investors in the company. By issuing bonus shares, the company tries to increase the morale of the shareholders. It is a financial reward that the company gives to its shareholders.
Implications of Bonus Shares
Bonus shares that are issued to stakeholders have two implications on the people:
- Number of shares for trading increases
- Management`s contribution towards growth of the company and its profits
Advantages of Issuing Bonus Shares
- Shareholders get their undistributed profits as bonus shares
- Issue of bonus shares keep the stakeholders happy.
- By issuing bonus shares, the company is able to increase the morale and motivation level of the stakeholders
- The share capital increases, thus, increasing the security of the creditors.
- By issuing bonus shares, it increases the marketability of the shares
Disadvantages of Issuing Bonus Shares
- Issue of bonus shares declines the rate of dividend in the future
- The companies encourage speculative dealings in shares by issuing bonus shares
- Issue of bonus shares is a very lengthy process. It requires the approval of SEBI which might delay in the issue of shares
Conditions to Be Fulfilled Before Issuing Bonus Shares
Though the company can issue bonus shares to its stakeholders but there are certain conditions that are to be fulfilled to issue bonus shares.
- The company can issue bonus shares only if the Articles of Association of the company have a provision of the same. If there is no such provision in the articles of association, the same has to be amended. This amendment can take place at the general meeting by passing a special act of resolution.
- The amended articles of association need to be approved by the shareholders on suggestions of Board of Directors of the company.
- To issue bonus shares, the guidelines issued by SEBI must be kept in consideration. The company has to ensure that by issuing bonus shares, it does not increase the total share capital more than approved share capital. If the authorized share capital is less, then the same has to be increased by changing the clause of capital in the Memorandum of association.
- Any loan taken by the company from any bank or financial institution, the permission is required from the bank or financial institution for issuing bonus issues.
- There can be two types of bonus shares – fully paid up bonus shares and partly paid up bonus shares. The company can only issue fully paid up bonus shares.
Issue of Bonus shares not only increase the capital base of the company, it also increases the morale of the stakeholders which becomes a strong point for the company. The shareholders feel that they are being rewarded and their motivation level increases. But, before the company issues bonus shares, it has to be very careful with the process as it is very complicated.