Purpose: Companies issue bonus shares to capitalize on their reserves, increase liquidity of their stock, and make their shares more affordable to retail investors.
Mechanism: Instead of paying dividends in cash, the company distributes additional shares to shareholders. For example, a 1-for-1 bonus issue means shareholders receive one additional share for each share held.
Impact on Shareholders: While bonus shares increase the number of shares held, they do not change the total value of an investor's holdings. The share price typically adjusts proportionately to reflect the increased number of shares.
Accounting Treatment: From an accounting perspective, a bonus issue transfers an amount from the company's retained earnings to share capital. It does not affect the overall equity of the company.
Tax Implications: In many jurisdictions, receiving bonus shares is often not taxable until the shares are sold. However, tax laws can vary, so shareholders should consult with tax advisors for specific guidance.
Market Reaction: Bonus issues are generally viewed positively by the market, as they signal that the company has enough reserves to reward shareholders without affecting cash flow.
Legal and Regulatory Requirements: Companies must comply with regulatory requirements and obtain approval from shareholders and relevant authorities before issuing bonus shares.
Purpose of Bonus Issue:
Shareholding Structure:
Ratio of Bonus Issue:
Authorization by Shareholders:
Impact on Share Capital:
Financial Implications:
Listing Requirements:
Record Date and Ex-Bonus Date:
Regulatory Compliance:
Communication to Shareholders:
Board Resolution: A resolution passed by the board of directors authorizing the issuance of bonus shares. This document outlines the decision-making process and the details of the bonus issue.
Shareholders' Approval: Depending on local laws and the company's articles of association, approval from shareholders may be required. This is usually obtained through a resolution passed at a general meeting of shareholders.
Amendment to Articles of Association: If the existing articles of association do not permit the issuance of bonus shares, they may need to be amended. This requires a special resolution of shareholders and submission of the amended articles to the relevant authorities.
Application to Regulatory Authorities: In many jurisdictions, companies are required to file an application with the regulatory authorities (such as the Securities and Exchange Commission or Registrar of Companies) seeking approval for the bonus issue. This application typically includes details such as the number of bonus shares to be issued, the basis of allotment, and any relevant financial statements.
Prospectus or Circular: Depending on local regulations, a prospectus or circular may need to be prepared and distributed to shareholders, detailing the terms of the bonus issue, its impact on shareholders, and other relevant information.
Financial Statements: Updated financial statements may be required to accompany the application for bonus issue. These statements should reflect the financial health of the company and justify the issuance of bonus shares from retained earnings or other reserves.
Legal Opinions and Certificates: Legal opinions certifying compliance with applicable laws and regulations, as well as certificates of good standing from relevant authorities, may be required as part of the documentation.
Listing Requirements (if applicable): For companies listed on stock exchanges, compliance with listing requirements (such as approval from the stock exchange and updating of listing particulars) is essential.
Taxation and Accounting Treatment: Documentation related to the tax implications of the bonus issue and its accounting treatment should also be prepared in consultation with tax advisors and auditors.
Communication Plan: A communication plan outlining how the company intends to inform shareholders and the public about the bonus issue, including press releases, announcements, and disclosures on the company's website or regulatory filings.
1. What is a bonus issue?
A bonus issue, also known as a scrip issue or capitalization issue, is when a company distributes additional shares to existing shareholders at no cost, based on their current holdings.
2. Why do companies issue bonus shares?
Companies issue bonus shares to capitalize their reserves, reward shareholders without using cash, increase liquidity of their shares, and enhance investor confidence by demonstrating financial strength.
3. How are bonus shares different from stock splits?
Bonus shares are issued free of cost to shareholders, whereas in a stock split, existing shares are divided into multiple shares with a lower face value but with proportionate increase in number, usually to make them more affordable.
4. Are bonus shares taxable?
Bonus shares are typically not taxable for shareholders at the time of issuance. However, tax implications can vary depending on local tax laws and when the shares are eventually sold.
5. How does a bonus issue affect the share price?
In theory, a bonus issue does not change the total market value of the company or the shareholders' wealth, as the share price adjusts proportionally to reflect the increased number of shares outstanding.
6. What are the regulatory requirements for a bonus issue?
Companies typically need to comply with regulatory requirements, which may include obtaining approval from shareholders, filing necessary documents with regulatory authorities, and ensuring compliance with corporate governance standards.
