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What is a Bonus Issue?
Bonus issues are additional shares issued to existing shareholders of a company at no cost. The new shares issued are based on the current holding. A bonus issue is also known as a Scrip Issue or capitalisation issue.
During cash shortages, companies may seek to issue bonus shares to uphold shareholder satisfaction. Unlike cash dividends, bonus shares do not involve cash outflows, instead, they increase the company’s share capital without affecting its net assets.
Why Bonus Issue?
One of the reasons companies issue additional shares is for liquidity purposes, by issuing bonus shares, the company reduces the price per share, making it more affordable for investors. This reduction in share price encourages participation in trading and increases the availability of liquid shares in the market. Improved liquidity facilitates more accurate price discovery and valuation of the company’s shares, benefiting both investors and the company.
Difference Between Bonus Issue and Stock Split
Stock split involves dividing the existing share into multiple shares according to a split ratio. A company announces a stock split to reduce the price of the shares. The purpose of a stock split is to make the stock available to a large audience, improve liquidity and increase the number of shares.
Bonus Issue is considered an alternative to cash dividends.
- The purpose of a stock split is to make the stock affordable to all investors while a bonus issue is issued to reward existing shareholders.
- Existing shares are divided in stock split while additional shares are issued in bonus issue.
Advantages of Bonus Issue
- Investors do not pay tax on additional shares.
- Additional shares are issued free of cost to the shareholders.
- Shareholders will receive dividends on more shares.
- It allows a company to utilize its reserves indefinitely and enhance the company’s creditworthiness.
Disadvantages of Bonus Issue
- It encourages speculative dealings in the
company’s shares - Issuing bonus issues doesn’t provide the company
with immediate cash inflow.
It reduces the company’s reserves.
HOW CAN MCL HELP?
Meristem Capital Limited as a financial adviser and issuing house can advise on various bonus issue structures, determining the ratio of the bonus shares to be issued and ensuring compliance with regulatory requirements as well.