WHY BONUS SHARES ARE ISSUED

What Are Bonus Shares?

Bonus shares are free shares given to existing shareholders of a company. They are issued by the company's board of directors and are usually in proportion to the number of shares already held by each shareholder. They are a form of dividend, but instead of being paid in cash, they are paid in shares. Bonus shares are also known as stock dividends or scrip dividends. Companies issue bonus shares for various reasons.

Reasons for Issuing Bonus Shares

There are various reasons why a company might issue bonus shares:

1. To Reward Shareholders:

A company may issue bonus shares to reward its shareholders for their loyalty and support. This is especially common when the company has been doing well and is in a position to share its profits with its shareholders.

2. To Raise Capital:

A company may issue bonus shares to raise capital for expansion or other projects. When a company issues bonus shares, it increases the number of shares outstanding. This dilutes the ownership of existing shareholders, but it also raises capital for the company.

3. To Improve Market Liquidity:

A company may issue bonus shares to improve the liquidity of its shares in the market. When a company issues bonus shares, the number of shares outstanding increases, which makes it easier for investors to buy and sell the shares. This can lead to a more active market for the company’s shares.

4. To Correct the Share Price:

A company may issue bonus shares to correct the share price. If the share price is too high, the company may issue bonus shares to bring the share price down to a more affordable level. This can make the shares more attractive to potential investors.

5. To Restructure the Company’s Capital:

A company may issue bonus shares to restructure its capital. For example, a company may issue bonus shares to convert preference shares into ordinary shares.

Advantages and Disadvantages of Bonus Shares

There are both advantages and disadvantages to issuing bonus shares.

Advantages:

• Bonus shares can reward shareholders for their loyalty and support.
• Bonus shares can raise capital for the company.
• Bonus shares can improve the liquidity of the company's shares in the market.
• Bonus shares can correct the share price.
• Bonus shares can restructure the company's capital.

Disadvantages:

• Bonus shares can dilute the ownership of existing shareholders.
• Bonus shares can lead to a fall in the share price.
• Bonus shares can be used to manipulate the market.

Conclusion

Bonus shares can be a useful tool for companies to reward shareholders, raise capital, improve market liquidity, and restructure their capital. However, it is important to weigh the advantages and disadvantages of issuing bonus shares before making a decision.

Frequently Asked Questions

1. What are bonus shares?
Bonus shares are free shares given to existing shareholders of a company.

2. Why do companies issue bonus shares?
Companies issue bonus shares for various reasons, such as to reward shareholders, raise capital, improve market liquidity, correct the share price, and restructure the company's capital.

3. What are the advantages of issuing bonus shares?
The advantages of issuing bonus shares include rewarding shareholders, raising capital, improving market liquidity, correcting the share price, and restructuring the company's capital.

4. What are the disadvantages of issuing bonus shares?
The disadvantages of issuing bonus shares include diluting the ownership of existing shareholders, leading to a fall in the share price, and being used to manipulate the market.

5. How are bonus shares taxed?
Bonus shares are generally not taxable in most countries. However, there may be some exceptions to this rule.