What is a Bonus Issue?
A bonus issue occurs when a company gives out extra shares to its existing shareholders for free instead of increasing the cash dividend payout. Shareholders get extra shares in proportion to what they already own. For example, a company may give out one bonus share for every 10 shares held.
Understanding Bonus Issues
- Purpose
- A bonus issue occurs when a company has reserves but no cash flow. It allows the company to reward shareholders without affecting its liquidity.
- Effect on the Company
- The bonus issue does not result in any cash outflow.
- It increases the company's share capital while reducing its reserves by the same amount.
- The net assets or the overall valuation of the company remains unchanged.
- Impact on Share Price
- The total number of shares increases, leading to a proportionate decrease in the stock price.
- This makes the shares more affordable and accessible to retail investors.
- Tax Implications for Shareholders
- Bonus shares are not taxed when issued.
- But if sold, any gain will be taxed as a capital gain.
Advantages of a Bonus Issue
- Enhances Shareholder Wealth: Rewards shareholders by increasing the number of shares they own.
- Boosts Liquidity: The increased number of outstanding shares and reduced prices make the stock more liquid in the market.
- Investor Attraction: Lower price after bonus issue attracts more retail investors and market participation.
- Good Sign: The company is confident with its profitability and reserves, boosting investor confidence.
- Tax Efficient: Shareholders get tax efficiency as bonus shares are not taxed when received.
Key Considerations for Shareholders
- Dilution of Value Per Share: The market price of shares decreases after a bonus issue to maintain the same market capitalisation.
- Capital Gains Tax: Selling bonus shares will be taxed based on the holding period and gain.
- Liquidity Option: Shareholders needing cash can sell some shares to meet their financial needs.
Key Takeaways
- More Companies: Technology and finance companies are doing bonus issues to increase shareholder value.
- Digitalisation: Online platforms are making it easier to track bonus shares—less shareholder admin.
