- Date : 22/04/2022
- Read: 3 mins
Bonus shares declared by a company enable investors to increase their income while companies spread out their equity base. Here are the advantages and disadvantages of bonus shares.
Bonus shares are free shares granted by a company to its shareholders based on the number of shares that a shareholder owns. Companies issue bonus shares to encourage retail participation and increase their equity base. Suppose a company performs very well and earns huge profits, it can offer bonus shares. Bonus shares are tax free.
Why does a company issues bonus shares?
When a company makes good profits but is unable to issue dividends due to lack of cash, it issues bonus shares. The investor enjoys an additional share unit and he is free to sell it in the open market and earn profit.
The company stands to gain a new investor once the shareholder sells the unit and if the company continues to do well it is able to earn a lot of goodwill.
Also Read: 5 Most Expensive Shares in The world
Ratio in bonus shares
It means that a shareholder would get bonus shares based on the number of shares held. There are three types of ratio structures:
The value of investment remains the same even though the quantum of share increases in each ratio shown.
Who are eligible for bonus shares?
All shareholders are eligible for bonus shares. A record date is set by the company before issuing the bonus shares to the shareholders. If you own shares of the company as per the record date then you are eligible for bonus shares.
Advantages of bonus shares
- There is no need to pay any tax for acquiring bonus shares. If the shareholder sells the bonus shares he is required to pay capital gains tax.
- If there are long-term shareholders who receive bonus shares, it is beneficial for them. The value of these shares comes down when bonus shares are issued. But the value of investment remains the same.
- The cash is used for business growth by the company, so the faith of the investors in the company grows as well.
- If the company plans to issue dividends in future, the investor gains by it as he now has more shares than before due to bonus shares.
- By issuing bonus the company is able to sustain its credibility in the market as a long-term player. This ensures more investors for the future of the company.
- The liquidity of the company increases in the market as more number of shares are there in the market due to bonus shares.
- The share capital of the company increases and hence it has a direct effect in its perceived size in the market.
Disadvantages
- Since the capital reserve is used, issuing bonus shares is more expensive than declaring dividends.
- The company does not receive any money for issuing bonus shares.
- Since the value of shares is reduced after the issuing of bonus shares, it might become unattractive for investors making the stocks less desirable.
Who authorizes bonus shares
- The Articles of the company authorize the issue.
- The recommendation of issue of bonus shares is by the resolution of the Board of Directors, later approved by the shareholders during the general meeting.
- Permission is also sought by the Controller of Capital Issues.
To find out which companies issued bonus in 2021 click here.
Also read: How Much Tax Do You Pay On Dividend Income From Shares?
