Reviewed by Sep 30, 2020| Updated on
A bonus issue is an offer given to the existing shareholders of the company to subscribe for additional shares. Instead of increasing the dividend payout, the companies offer to distribute additional shares to the shareholders. For example, the company may decide to give out one bonus share for every ten shares held.
Such an offer is given when the company is short of cash, and the shareholders expect regular income. Bonus issue does not involve cash flow in the company. It does not increase the net assets of the company but only the share capital.
Shareholders can choose to sell the shares to meet their liquidity needs at the time of emergency.
Bonus shares are not taxable at the time of issue in the hands of shareholders.
A shareholder might have to pay capital gains tax if they sell them.
Increasing the number of outstanding shares by issuing bonus shares decreases the price of the share, making them more affordable for retail investors.