Bonus Issue Of Shares: Explain in details


What is a Bonus Issue?

A bonus issue is an offer of additional shares issued by the company without any charge to the existing shareholders. A bonus issue is also known as a Scrip issue or a Capitalization issue. These additional free share are known as Bonus share.

Bonus Issue of share Example

A company issues bonus shares in the form of a ratio, such as 1:1, it means a company may give one bonus share for every one share held.

Understanding Bonus Issue

The new shares are issued free of cost and are always distributed from company's reserve & surplus. The issueing bonus shares do not include any cash flows but it does change the share capital without any change in the underlying assets.

Bonus shares are issued according to the share of each shareholder of the company. Bonus issues increase equity of the shareholders, as they are issued in a constant proportion of the existing shareholders which keeps the relative equity of each shareholder as before and dilute the existing earnings per share. 

For example, a two for one bonus issue entitles each shareholders two shares for every one they hold before the issue. Suppose, a shareholder with 100 shares will receive 200 bonus shares [(100 × 2/1) = 200 shares].

Bonus Issue vs Stock Split

(a) Meaning:

Bonus issue is allotment of new shares to existing shareholders for free.

Stock Split is division of one share into multiple shares for existing shareholders.

(b) Objective:

In bonus issue to disburse accumulated earnings to existing shareholders without having to pay dividends.

In stock Split to enhance affordability and liquidity in stock market.

(c) Change in face value:

Face value per share remains same in bonus issue.

Face value per share falls in stock Split.

(d) Change in share capital:

In bonus issue, share capital increases.

In stock split, share capital remains same.

(e) Impact on EPS:

In bonus issue, EPS falls.

In stock split, EPS also falls.

Conditions for Issuing Bonus Share:

(a) The Bonus Shares must be authorized by the Article of Associate of the company.

(b) The issue of bonus shares must be recommended by the resolution of the Board of Directors of the company.

(c) The regulator of capital issues must be allowed to issue of bonus shares.

The above mentioned are the conditions that a company must be fulfill to issue bonus shares.

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