by Bonus shares, also known as scrip dividends, are additional shares issued by a company to its existing shareholders, free of cost. The issuance of bonus shares is a way for a company to reward its shareholders without paying out cash dividends. Bonus shares are issued in proportion to the number of shares held by each shareholder, and the total value of the shares held by the shareholder remains the same before and after the issuance of bonus shares.
For example, if a company issues a bonus share for every ten shares held by a shareholder, a shareholder who holds 100 shares will receive 10 bonus shares, increasing the total number of shares held to 110. However, the value of each share will be adjusted to reflect the new number of shares, so the total value of the shares held by the shareholder remains the same.
The issuance of bonus shares does not affect the financial position of the company, as no cash is paid out. Instead, the company uses its accumulated profits or reserves to issue the bonus shares. The issuance of bonus shares is seen as a signal of the company’s financial strength and growth prospects, as it implies that the company has enough profits to reinvest in the business without affecting its cash reserves.
Bonus shares are also a way for companies to increase liquidity in their shares, as the increase in the number of shares may attract new investors who were previously deterred by the high price of the shares. Bonus shares can also be used as a way to prevent dilution of the shareholding of existing shareholders, as the issuance of new shares through other means, such as a rights issue or an initial public offering, may result in the dilution of the ownership percentage of existing shareholders.
As mentioned earlier, bonus shares are additional shares issued by a company to its existing shareholders, free of cost. Here are some types and features of bonus shares:
Types of Bonus Shares:
- Simple Bonus Shares: These are bonus shares that are issued free of cost to existing shareholders in proportion to the shares held.
- Capitalization Bonus Shares: These are bonus shares issued by converting the accumulated reserves or profits of the company into shares.
Features of Bonus Shares:
- No Cost: Bonus shares are issued to existing shareholders free of cost, which means that they do not have to pay anything to receive these additional shares.
- Proportionate Issuance: Bonus shares are issued to shareholders in proportion to the number of shares held by them. For example, if a company issues one bonus share for every ten shares held by a shareholder, a shareholder holding 100 shares would receive 10 bonus shares.
- No Change in Total Value: The issuance of bonus shares does not change the total value of a shareholder’s investment in the company, as the value of each share is adjusted to reflect the new number of shares held.
- Increases Liquidity: The issuance of bonus shares increases the number of shares outstanding, which may attract new investors who were previously deterred by the high price of the shares, thereby increasing liquidity in the shares.
- Signals Financial Strength: The issuance of bonus shares is seen as a signal of the company’s financial strength and growth prospects, as it implies that the company has enough profits to reinvest in the business without affecting its cash reserves.
- Reduces Dilution: The issuance of bonus shares can be used as a way to prevent dilution of the shareholding of existing shareholders, as it increases the number of shares outstanding without diluting the ownership percentage of existing shareholders.
Redemption of Bonus Share
Bonus shares are issued by companies to their shareholders free of cost, and therefore they cannot be redeemed as they are not backed by any cash value. Unlike regular shares, which have a face value and a market value, bonus shares do not have any cash value or redemption value.
When bonus shares are issued, the number of shares outstanding increases, which dilutes the earnings per share (EPS) and the price-to-earnings (P/E) ratio of the company’s shares. However, since bonus shares do not involve any cash payment, there is no obligation on the part of the company to redeem them.
Therefore, bonus shares cannot be redeemed like regular shares, and they remain outstanding until they are sold or transferred by the shareholder. However, if a company wants to reduce the number of outstanding shares, it can do so by buying back its own shares from the market or by offering a share consolidation or reverse stock split, which involves reducing the number of shares outstanding by combining several shares into one.
Steps involved in a share buyback or share consolidation:
- Approval: The first step in a share buyback or share consolidation is to obtain the approval of the company’s board of directors and shareholders.
- Announcement: Once the approval is obtained, the company must announce its intention to buy back shares or consolidate its shares through a public announcement or filing with the regulatory authorities.
- Tender Offer: The company may then make a tender offer to its shareholders, inviting them to sell their shares back to the company at a specified price.
- Share Consolidation: In the case of a share consolidation, the company will combine several shares into one, reducing the total number of outstanding shares.
- Payment: Once the tender offer or share consolidation is complete, the company will pay the shareholders who have sold their shares back to the company.
