Bonus Shares

Bonus shares, also known as scrip dividends or capitalization issues, are additional shares distributed by a company to its existing shareholders at no cost. Unlike a stock dividend where additional shares are issued, bonus shares are issued without requiring any additional payment from the shareholders. The aim is to capitalize on the accumulated reserves and surplus of the company.

Here's how bonus shares typically work:

1. Accumulated Reserves:

- Companies often accumulate reserves and profits over time. These reserves can be used to issue bonus shares.

2. Board Approval:

- The decision to issue bonus shares is usually made by the company's board of directors. They consider factors such as the company's financial health, the need for capitalization, and the impact on shareholder value.

3. Proposal to Shareholders:

- Once the board approves the issuance of bonus shares, the proposal is presented to the shareholders for approval. Shareholders may vote on the resolution during a general meeting.

4. Record Date:

- After receiving approval, the company announces a record date. Shareholders on record as of this date are eligible to receive the bonus shares.

5. Distribution:

- On the distribution date, bonus shares are credited to the demat accounts of eligible shareholders. The distribution ratio specifies how many bonus shares a shareholder receives for each share held. For example, a 1:1 bonus issue implies one additional share for every share held.

6. Impact on Share Capital:

- The issuance of bonus shares does not change the total market value of the company, but it does increase the number of outstanding shares. As a result, the company's earnings per share (EPS) and book value per share may be adjusted.

7. Market Reaction:

- Bonus shares are often seen as a positive signal by investors, indicating that the company is in good financial health and is confident about its future prospects. However, the market price per share tends to adjust based on the bonus issue ratio.

8. Benefits for Shareholders:

- Shareholders benefit from bonus shares as they receive additional shares without having to spend any money. While the market value of their holdings may not change proportionately, the increased number of shares can enhance liquidity and provide a psychological boost.

Bonus shares are a way for companies to reward existing shareholders and enhance their ownership in the company. The decision to issue bonus shares is influenced by the company's financial performance, strategic objectives, and the desire to strengthen the capital base. It's important for shareholders to understand the implications of bonus issues on their holdings and the overall financial position of the company.