Bonus issue

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Issue of Bonus Shares

Bonus shares are additional shares given to existing shareholders without any cost, utilizing the company's accumulated reserves. These shares are issued in proportion to the shareholders' existing holdings, and they serve to capitalize on the company's reserves without distributing cash dividends.

Circumstances Warranting Bonus Shares Issue

  • Accumulated Large Reserves:
    • Companies with substantial reserves (capital or revenue) may capitalize these reserves by issuing bonus shares to shareholders.
  • Inability to Give Cash Bonus:
    • When a company cannot distribute a cash bonus due to potential adverse effects on working capital, it may opt to issue bonus shares instead.
  • Exceeding Value of Fixed Assets:
    • If the value of fixed assets significantly exceeds the capital, issuing bonus shares helps align the share capital with the asset value.
  • Avoiding Higher Rate of Dividend:
    • A higher rate of dividend might not be sustainable in the future. Issuing bonus shares helps maintain a regular dividend payout without raising cash dividends excessively.
  • Market Value Exceeds Paid-Up Value:
    • When the market value of shares far exceeds their paid-up value, issuing bonus shares can align the market price with the company's capital structure.

Objects of Bonus Issue

  • Inexpensive Capital Raising:
    • Issuing bonus shares conserves cash resources while raising capital inexpensively.
  • Increased Marketability:
    • Bonus shares lower the market price of shares, making them more affordable and marketable.
  • Indicator of Good Prospects:
    • Issuing bonus shares signals to investors that the company has strong future prospects and robust financial health.

Procedure of Bonus Issue

  • Increase Authorized Capital:
    • If necessary, the company should pass an ordinary resolution to increase its authorized capital.
  • Book Entries and Distribution:
    • After making necessary entries in the books, the company distributes additional share certificates to existing shareholders free of charge.

Types of Bonus Issue

  • Fully Paid Bonus Shares:
    • These are shares distributed free of cost in proportion to the shareholders' existing holdings.
  • Partly Paid Bonus Shares:
    • Bonus shares used to convert partly paid shares into fully paid shares.

Sources for Bonus Issue

  • Fully Paid-Up Bonus Shares:
    • Can be issued from:
      • Capital Redemption Reserve
      • Securities Premium (realized in cash)
      • Capital Reserve (realized in cash)
      • Profit and Loss Account
      • General Reserve
      • Investment Allowance Reserve
      • Sinking Fund for Redemption of Debentures (after redemption)
      • Development Rebate Reserve
  • Partly Paid-Up Bonus Shares:
    • Can be issued from:
      • Capital Reserve (realized in cash)
      • Profit and Loss Account
      • General Reserve
      • Investment Allowance Reserve
      • Development Rebate Reserve
      • Sinking Fund for Redemption of Debentures (after redemption)

Note:

  • Securities Premium Account and Capital Redemption Reserve Account cannot be utilized for issuing partly paid bonus shares.
  • Capital reserves are typically utilized first, if legally permissible, over revenue reserves.

Summary: The issuance of bonus shares is a strategic financial decision to capitalize on a company's reserves without depleting its cash resources. It benefits shareholders by providing them with additional shares and enhances the company's marketability and investor confidence. The process involves careful adherence to legal and financial regulations to ensure sustainable growth and financial stability.