What is Bonus Share?
Bonus shares or bonus issue are additional shares distributed to the current shareholders without taking any cost. Bonus shares are distributed based upon the number of shares that a shareholder owns.
Issuing bonus shares does not involve cash flow. It increases the company’s share capital but not its net assets.
Why Bonus Shares are Issued by the Companies?
There are three most prominent reasons for this, which are as follows:
- To reward the investors: Issuing of the additional shares is one of the ways of showing appreciation to the investors. Also, the confidence of the investors get boosted, which is altogether good for the company.
- To increase the liquidity of the shares: When the bonus shares are issued by the company, then it increases in the number of outstanding shares. As there are higher outstanding shares, the participation of the traders gets increased, which in turn increases the liquidity of the stocks.
- To adjust the stock price: Whenever a company decides to issue bonus shares, then the prices of the stocks fall to a reasonable range. It is beneficial for those investors who were not able to buy the shares earlier because of the higher price.
For example, suppose the current price of a company share is Rs 1000 and an investor holds 100 shares of a company. At present, the net asset of the investor is Rs 1, 00,000 (1 Lakh).
The company declares a 3:1 bonus that is for every one share, he gets 3 shares for free. That is a total 300 shares for free and his total holding will increase to 400 shares.
But now the share price of the company adjusted to Rs 250 and the net asset of the investor is Rs 1, 00,000 (1 Lakh).
Here you can see that the number of shares of the company increases but the net asset is the same as the previous.
How Bonus Issue is different from Stock Split?
- A company announces a bonus issue when its cash reserves increase and it decides to convert the increased value into shares. Thus the shareholder gets a bonus share free of cost. Whereas the company announces a stock split when the share price of the company increases too high or beyond a certain level.
- In Bonus Share, there is no change in face value but in Stock Split the face value of the stock is adjusted accordingly.
