Is bonus issue of shares good?
Bonus shares issued by companies are the additional shares issued by the listed company to its existing shareholders when they are not in a situation of paying a dividend to its shareholders or equity holders and no additional charges are levied on the shareholders by a company for issuing bonus shares.
They are issued by companies having earned high profits or large free reserves but do not have the liquidity to pay the dividend to their shareholders. Therefore, the companies issue new or additional shares to the existing shareholders.
Issuing bonus shares is also called “capitalization of profits” because it is given out of the profits or reserves of the company. Despite having sufficient liquidity, companies may still issue bonus shares to avoid the high dividend distribution tax (DDT) which is levied on them at the time of dividend declaration.
However, they are assigned to the shareholders on the basis of their existing stake in the company. If a company issues bonus shares in the ratio of 1:2, it would mean that an existing shareholder would get two additional shares for one existing share. Suppose a shareholder holds 1,000 shares of the company. When the company issues bonus shares, he will receive 500 bonus shares, i.e. 1000 *1/2 = 500. It only increases the share capital of the company by issuing bonus shares but does not increase the net assets through cash flows.
After the bonus issue, the dividend per share and share value decreases as there is an increase in the number of outstanding shares in the market. The investment value of the shareholder will increase after the bonus issue.
What Are the Effects of Bonus Issues?
It will increase the number of outstanding shares in the market.
It will reduce the share price in the proportion to the issued bonus shares.
It will reduce the free reserves of the company.
It will increase the implicit value of the equity share in the market.
It will increase liquidity in the market because of the rise in the number of outstanding shares in the market.
Reduction in per share ratios such as earning per share, book value per ratio, price to earnings ratio, etc.
Why do shares fall after bonus?
Does share price increase after bonus?
What are the disadvantages of bonus shares?
Why do shares fall after bonus?