What is Bonus Share?

Bonus shares are additional shares which have been issued by a company to all existing shareholders at no cost involved for the shares. Respective share holders can perform a transaction for these shares in the secondary market to meet their liquidity requirements.

Bonus shares are issued to share holders in certain situations in which the company is not able to pay the dividend in cash, because of possible shortage of liquid funds, despite having a profitable turnover. In such cases, companies issues bonus shares instead of paying dividend. Bonus shares are issued in form of new or additional shares to the existing shareholders in proportion to shares and dividends held by shareholders. 

When the company is issuing the bonus shares, since the company converts the profits or reserves in to share capital, there is capitalisation of profits. Hence, the company cannot charge shareholders for issuing the bonus shares. The sum equal to the value of bonus share issued is adjusted against the profits or reserve, and there after transferred to Equity Share Capital Amount

In some cases companies often issue bonus shares, even if companies are not shortage of liquid funds they issue bonus shares as a strategy to avoid high dividend distribution tax, which has to be paid when declaring dividend to the shareholders.

What is Bonus Issue?

Term bonus issue is used to define the issue of bonus share. Bonus issue is based on the number of shares held by the shareholder. 

Who is eligible for bonus share?

Investors who owns shares of a particular company before the record date and ex-date set by the company are eligible for receiving the bonus shares. In India T+2 rolling system is followed for the delivery of the shares, where as ex-date is two days ahead of record date. All the shares which have been bought by shareholders should be bought before the ex-date because if the investors purchases the shares on the ex-date they will not be owning the shares by the set record date and they will be eligible for bonus shares.

Guidelines to be followed for issuing bonus shares.

  1. Company must get the sanction from Articles of Association before the bonus shares can be issued to shareholders.
  2. In case of general meeting held for shareholders, the bonus share issuance should be sanctioned by the shareholders as well.
  3. Company should follow all SEBI guidelines before issuing the bonus shares.
  4. Company should ensure that total share capital share should not exceed authorised share capital when issuing the bonus share.
  5. If company has taken a loan, financial institutions involved must be informed.
  6. Before issuing the bonus share, the company must take the consent of Reserve Bank of India.

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