By: Aakanksha Murarka
A bonus issue of shares is when a company gives its shareholders additional shares, usually free of charge. Bonus issues are often used as a way to attract new investors and reward existing shareholders. While bonus issues may be beneficial to shareholders, they can also have some drawbacks.
Importance of Issuing of Bonus Share
A bonus share is a free share of stock given to current shareholders in proportion to the number of shares that they own. A bonus share issue is often done when a company has surplus cash, but it can also be done as a way to reward shareholders or raise capital.
The issuing of bonus shares can be an important event for a publicly traded company for a few different reasons. First, it can be a signal to the market that the company is doing well and has extra cash on hand. This can lead to an increase in the stock price, which benefits all shareholders. Second, issuing bonus shares can help to attract new investors and boost liquidity in the stock. Finally, giving existing shareholders free shares can help to build loyalty and encourage them to hold onto their shares for the long term.
What is a bonus issue of shares?
The number of new shares each shareholder receives is determined by dividing the total number of new shares being issued by the total number of outstanding shares. For example, if a company has 1,000 outstanding shares and it announces a 2-for-1 bonus issue, each shareholder would receive two new shares for every share they own.
Bonus issues are generally used by companies as a way to increase the liquidity of their stock or to reward shareholders. Bonus issues are sometimes also referred to as scrip dividends.
How do companies decide to do a bonus issue of shares?
For example, if a shareholder owns 100 shares and the company does a 1-for-1 bonus issue, the shareholder would then own 200 shares.
It's also a way for companies to reward shareholders who have been with the company for a long time.
There are a few things that companies need to consider before doing a bonus issue of shares. One is whether or not the company can afford it. If the company is already struggling financially, issuing new shares could make things worse. The other thing companies need to consider is whether or not the extra shares will dilute earnings per share (EPS). Diluted EPS is calculated by taking into account all of the outstanding shares of a company, including those that have been issued as part of a bonus issue. If EPS goes down too much, it can be negative for shareholders.
In the end, it's up to each company to decide whether or not doing a bonus issue of shares is right for them. There are pros and cons to consider, but ultimately, it's up to management to make the decision.
How does a bonus issue of shares affect shareholders?
Bonus shares are different from a rights issue, where shareholders are given the option to buy more shares at a discounted price.
Bonus issues can also be used as a way to return excess cash to shareholders, who may then reinvest it back into the company or use it for other purposes.
While bonus issues can be beneficial for shareholders, there are some risks involved. For example, if the company's share price falls after the bonus issue, shareholders will end up with less valuable shares. And if the company is doing poorly overall, issuing new shares could just be delaying the inevitable. While bonus issues can be helpful in some situations, shareholders need to be aware of the risks before making any decisions.
Procedure of issue of bonus shares
The corporation must complete the steps below to issue Bonus shares.
Call a Board Meeting: Calling a Board Meeting is the first thing that needs to be done. The notice must be given at least seven days before the board meeting by Section 173(3) of the Act.
Distribute the draught minutes: The draught minutes must be distributed to all directors for feedback within the allotted period. The board resolution in the form MGT-14 for a public company must be submitted to the Registrar of Companies in less than 30 days.
Notice of General Meeting: A notice of the General Meeting must be delivered to all directors, shareholders, auditors, and eligible members, giving them at least 21 clear days to object to the issuance of bonus shares.
Organize a Board Meeting: The business must call a Board Meeting to approve the distribution of bonus shares and adhere to all related procedures.
Document No. PAS-3: Following the distribution of the firm with a share capital's securities, the company has 30 days to file the return of allocation in Form PAS-3. Below is a list of the attachments that will be needed:
Copies of the ordinary resolutions approved during the extraordinary general meeting.
Copies of the Board's decisions approving the share distribution.
The Form PAS-3 signatory will certify the List of Allottees, which will include each Allottee's name, address, occupation (if any), and the number of Securities Allotted to Each Allottee
Share certificates must be issued within two months after the date of allotment if the shares are stored in physical form. If the shares are held in Demat form, the corporation must notify the depository immediately upon allotment.
Conclusion
A bonus issue of shares is a great way to increase the ownership stake of existing shareholders in a company. This can be done by either issuing new shares or by re-allocating existing shares. Bonus issues usually happen when a company is doing well and wants to share its success with its shareholders. They can also be used to encourage shareholder loyalty or to raise capital for expansion. If you're thinking of investing in a company that has just announced a bonus issue of shares, it's worth doing your research first. But if all goes well, you could end up with a nice little windfall.
Well written!