Notes On Bonus Shares:

Meaning and Concept Of Bonus Shares:

According to the Oxford Dictionary, Bonus Shares means, “An extra dividend to the shareholders in a joint stock company from surplus profits.” This extra may be paid in the form of cash and shares. When it is paid in the form of shares, the shares so issued are termed as bonus shares. Bonus Shares are therefore, “Shares allotted by capitalisation of reserve or surplus of a corporate enterprise.”

Issue of bonus shares results in conversion of the profits of the company. Such shares are issued to the equity shareholders in proportion to their holdings of the equity share capital of the company.

Advantages of Issue of Bonus Shares:

I Company’s Point of View:

1. Saving of Cash:

Issue of bonus shares makes it possible for the company to conserve cash resources that can be utilised for future operations and needs.

Issue of bonus shares thus enables the company to satisfy the existing shareholders and at the same time retain its earnings

2. Balancing the Earnings per Shares:

If the earnings per share are high, the workers of the company may feel that they are being cheated while the consumers may feel that they are charged more for the products.

Issue of bonus shares helps to increase the number of shares of the company and maintain the earnings per shares of the company at a reasonable level without affecting the interest of the shareholders.

3. Marketability of the Company’s Shares:

Issue of bonus shares reduces the marketability of the company’s shares and keeps it within the reach of ordinary investors.

II Investors Point of View:

1. Tax Benefits:

Receiving dividends in terms of cash is liable for tax returns but stock dividend is not taxable. The shareholder may sale the bonus shares when he is in need of fund.

2. Indication of Higher Future Profits:

A company generally issue bonus shares when its earnings are expected to increase. In the absence of any such increase, its earnings per shares will get divert which will not be desired by the company.

3. High Psychological Value:

Issue of bonus shares increases confidence among the shareholders and the potential investors. As a matter of fact, the price of the shares may rise in the market after the bonus shares are issued.

Sources Of Issue Of Bonus Shares:

The different sources of issue of bonus shares are:

  1. Declaration out of the accumulated profit.
  2. General Reserve
  3. Capital profits or reserves not retained for any specific purpose
  4. Balance in sinking fund reserve for redemption of debentures after the debentures have been redeemed
  5. Capital Redemption Reserve
  6. Share Premium Reserved in cash.
Determination of the Quantum of Bonus Shares:

A. Residual Reserve:

The residual reserve after the proposed capitalisation should be at least 40% of the increased paid up capital.

The following points have to kept in mind

  1. If any capital reserve remains after the bonus issue of shares, it should not be included in computing the minimum reserve of 40%
  2. All contingent liabilities discussed in the audited accounts that have a bearing on the net profits should be considered while calculating the residual reserve of 40%
  3. The paid up capital includes equity as well as preference share capital for the purpose of this taste.