A company can pay bonus to its shareholders either in cash or in the form of shares. Many a times a company is not in a position to pay bonus in cash inspite of sufficient profit because of unsatisfactory cash position or because of its adverse effect on the working capital of the company. In such cases , If the company so desires and the articles of association of the company provide, it can pay bonus to its shareholder in the form of shares by making partly paid shares as fully paid or by the issue of fully paid bonus shares.
A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout. For example, a company may give one bonus share for every five shares held.
Advantages & Disadvantages of Bonus Shares:
From Investor’s Point of View
1) Investors do not have to pay any tax while receiving bonus shares from the company.
2) Bonus shares are considered beneficial for long-term shareholders of the company looking to multiply their investment.
3) Bonus shares are free of cost to shareholders as they are issued by the company, which increases the outstanding shares of an investor in the company and enhances the liquidity of the stock.
4) Bonus shares help build the trust of an investor in the company’s business and operations because they have invested in the company and, in turn, gives capital to the investor.
From Company’s Point of View
1) The issue of bonus shares enhances the company’s value and increases positions and image in the market, gaining the trust of existing shareholders and attracting several small investors to be a part of the stock market.
2) The companies have more free-floating shares with the issue of bonus shares in the market.
3) Issue of Bonus shares benefits companies to get themselves out of the situation where they are not able to or simply not prefer to pay cash dividends to their shareholders.
From Investor’s Point of View
1) There is no much of a disadvantage of owning the bonus shares from an investor’s point of view. However, they should know about receiving bonus shares because the profit will remain the same, but the number of shares will be increased as the earning per share will fall.
From Company’s Point of View
1) The company do not receive any cash while issuing bonus shares. As a result, the ability to raise money by following an offering is minimized.
2) When a company keep on issuing bonus shares instead of paying dividends, the cost of the bonus issued keeps adding up over the years.
