Bonus share

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A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns [1] While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant.

Explanation[edit]

Whenever a company announces a bonus issue, it also announces a book closure date which is a date on which the company will ideally temporarily close its books for fresh transfers of stock.

An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus shares are distributed in a fixed ratio to the shareholders.

Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before.

A bonus share issue is not a dividend. Although these shares are "distributed" from a company to its shareholders, this is almost never a "distribution" in the corporate law sense. That is because they represent no economic event – no wealth changes hands. The current shareholders simply receive new shares, for free, and in proportion to their previous share in the company. Therefore, a bonus share issue is very similar to a stock split. The only practical difference is that a bonus issue creates a change in the structure of the company's shareholders' equity (in accounting). Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's authorized share capital, the distribution of bonus shares only changes its issued share capital (or even only its outstanding shares).

References[edit]

  1. ^ "Definition of 'Bonus Share'", "The Economic Times"