Bonus Issue

What is Bonus Issue..?

Also referred to as a “capitalization issue” or “Scrip issue”, bonus issue refers to an offer of free additional shares to existing shareholders. For example, a company may decide in favor of distributing further shares as an alternative to increasing the total dividend payout.

Brand new shares are usually issued to shareholders in a proportionate value of their holdings. E.g., the company may prefer to issue on bonus share for every five shares held.Ads by Google

Alternatively, when a company’s Free Reserves are high, it may prefer capitalizing a part of it by issuing bonus shares to the existing shareholders in proportion to their holdings. The objective behind embarking on such an approach is to convert the reserves into equity. Bonus shares are generally issued free of cost. However, since the total number of shareholders does not change and so don’t their proportionate holdings, these bonus shares do very little to improve a shareholder’s ownership of the company.

Following the issue of bonus shares, the price of a company’s shares witness a decline – usually in proportion to the issue. However, because the dividend rate is strictly maintained more often than not, all shareholders can expect a larger yield on the enhanced holding. Subsequently, when the price of the share APPRECIATES, they can make further gains.

Edited and Updated 13th January 2014

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