A bonus issue is an offer given to the existing shareholders of the company to subscribe for additional shares. Instead of increasing the dividend payout, the companies offer to distribute additional shares to the shareholders. For example, the company may decide to give out one bonus share for every ten shares held.
11.3 – Bonus Issue
A bonus issue is a stock dividend, allotted by the company to reward the shareholders. The bonus shares are issued out of the reserves of the company. … If the ratio is 2:1 ratio, the existing shareholders get 2 additional shares for every 1 share they hold at no additional cost.
A company issues bonus shares for their shareholders in order to increase the liquidity of the stock as well as with the aim to decrease its stock price to make it affordable for investors.
Bonus shares are usually announced by the company with a record date, the date which is considered for the bonus shares. All the investors holding the shares on the record date are eligible for bonus shares. Company usually gives bonus shares as a substitute of dividend payouts.
How is bonus issue calculated?
Bonus shares are issued to each shareholder according to their stake in the company. For example, a 3 for 2 bonus issue would entitle each shareholder 3 shares for every 2 shares already held by them before the issue. e.g. A shareholder having 1000 shares would therefore receive 1500 bonus shares (1000 x 3 ÷ 2).
No, a company cannot issue Bonus Shares to other than existing shareholders, It can only issue bonus shares to the members/shareholders whose names appear in Register of Members on the record date: Q.
By Issuing bonus shares the number of outstanding shares in the market increases and at the same time value of each share decreases according to the bonus issue ratio but if more demand generates the share price can rise more than the decided post bonus price.
So if you own 20 shares, you will get 4*20 which is 80 additional shares. Who is eligible? All shareholders who own shares of the firm before the ex-date, which is determined by the firm, are eligible for bonus shares. When announcing a bonus issue the company also informs the shareholders regarding a record date.
There is no need for investors to pay any tax on receiving bonus shares. It is beneficial for the long-term shareholders of the company who want to increase their investment. Bonus shares enhance the faith of the investors in the operations of the company because the cash is used by the company for business growth.
For example, a three-for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500). Bonus shares themselves are not taxable.