A: Bonus shares, also known as scrip dividends or capitalization issues, are additional shares distributed by a company to its existing shareholders without any cash consideration. These shares are issued to shareholders in proportion to their current shareholding, typically as a result of accumulated profits or reserves.
Q: How Do Bonus Shares Work?
A: Bonus shares are issued by a company’s board of directors as a way to distribute its retained earnings or reserves to shareholders. For example, if a company announces a 1-for-1 bonus issue, each existing shareholder will receive one additional share for every share they already own, effectively doubling their shareholding.
Q: Why Do Companies Issue Bonus Shares?
A: Companies issue bonus shares for several reasons, including:
Capitalization of Reserves: Bonus shares allow companies to capitalize their accumulated profits or reserves without depleting their cash reserves or taking on debt.
Enhancement of Shareholder Value: Issuing bonus shares increases the total number of outstanding shares while maintaining the same total equity, which can lead to improved liquidity and marketability of the company’s shares.
Rewarding Shareholders: Bonus shares are often perceived as a form of reward for existing shareholders, demonstrating the company’s confidence in its financial strength and growth prospects.
Q: What Are the Effects of Bonus Shares on Shareholders?
A: Bonus shares have the following effects on shareholders:
Increased Number of Shares: Shareholders receive additional shares at no cost, increasing the total number of shares they own.
No Change in Total Value: While the number of shares increases, the total value of the investment remains the same as before the bonus issue, as the share price adjusts proportionally.
Dilution of Earnings Per Share: As the number of shares increases, the earnings per share (EPS) of the company may decrease, assuming profitability remains constant.
Q: How Are Bonus Shares Perceived by Investors?
A: Bonus shares are generally perceived positively by investors, as they are seen as a form of reward for existing shareholders and an indication of the company’s financial health and growth potential. However, investors also consider the impact of bonus shares on dilution and future earnings potential.
Q: What Are the Reporting Requirements for Bonus Shares?
A: Companies are required to disclose bonus share issues in their financial statements and provide relevant details in their annual reports and disclosures to shareholders. This includes information about the bonus issue ratio, record date, and any relevant conditions or restrictions associated with the bonus shares.
📈 CONCLUSION
Bonus shares are additional shares distributed by a company to its existing shareholders as a form of reward or capitalization of reserves. While bonus issues can enhance shareholder value and liquidity, investors should consider their impact on dilution and future earnings potential.
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