What is bonus shares issue With Advantages And Disavantages

We Have explained What is bonus shares issue With Advantages And Disavantages. Bonus shares are issued by the company when the company is performed but do not generate cash that they pay out dividends. It ensures that investors that depend on dividends for income will be able to earn from the sale in the market. They have the additional shares given to current shareholders without any cost. They are based on the number of shares owned by the shareholder. The principle is the same as the total number of shares that will increase with a constant ratio number of shares held to the number of shares outstanding.

The bonus issue is called a scrip issue/capitalization issue that offers free additional shares to existing shareholders. Here the company decides to distribute the shares to increase the dividend payout. The bonus issue of shares is stock issued by a company in lieu of the cash dividend. The shareholder can sell the shares to meet liquidity needs. The bonus issues are provided to shareholders when companies have short cash and expect regular income. They may be issued to restructure the company reserve.

Calculation

Consider ‘A’ as the company announces a bonus in the ratio of 2:3. Every three shares held by the shareholder receive two additional shares. The price in the above case gets adjusted if the shares are at a book value of Rs. 50 per share. The post bonus issues the value that would drop to Rs. 30. There is no change in the total book value of shares held by the shareholder if it has 3 shares valued at Rs. 150 prior to the issue. He would be left with 5 shares post the bonus with a book value of Rs.150.The stock price is adjusted on a proportionate basis.

Advantages

Investors will not pay any tax on receiving bonus shares. They are used for the long-term shareholders of the company to increase their investment. These will enhance the faith of investors in the operations of the company. It is because cash is used by the company for business growth. When the company declares a dividend in the future the investor will receive a high dividend. It occurs because he holds a large number of shares in the company due to bonus shares.

Disadvantages

Bonus shares will not add any value from a shareholder's perspective. They will deteriorate the quality of shareholders by increasing activity and entry of weaker hands in the stock. These will not produce any wealth as stock prices of the shares to reduce the proportion of bonus shares. The market capitalization will remain unchanged/same before by keeping the wealth of the existing shareholders intact. The shareholders will be disappointed at the truncated rate of dividends as the issue of bonus shares may not increase the earnings. The earnings will be distributed among a number of shares by reducing the earnings as per share. When the bonus shares are distributed at no additional cost in proportion to the investor holding in the company called as Fully Paid Bonus Shares. The Fully paid-up bonus shares can be issued from sources as capital reserves, profit and loss account, security, and capital redemption reserves.

Summary

Bonus shares are the shares provided free of cost. The record date is the cut-off date by which the investor holds a share that is eligible. The ex-date is the cut-off by which the investor must purchase shares and deposited them on the record date. The reason for issuing will range from providing dividends to the shareholder in the form of stock due to a shortage of cash to increase retail investor participation.

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