Bonus shares

Bonus Shares are shares distributed by a company to its

current shareholders as fully paid shares free of charge.
to capitalize a part of the company's retained earnings for
conversion of its share premium account, or distribution
of treasury shares. An issue of bonus shares is referred to
as a bonus share issue. 
For example – Mr. Alvin have 100 shares of a company . If
company declares 10% ( ie. 10:1) stock dividend (bonus
shares) then Mr. Alvin will get 10 extra shares
( 100*1/10 ) . Now total number of shares with him will
become 110 . In future , he will get dividend on 110
shares .
Note : bonus shares can be issued to existing shares
 Conditions for issue bonus share
• CONDITIONS FOR ISSUE OF BONUS SHARE:
• The following conditions must be satisfied before issuing bonus
shares:
• 1. Issue of Bonus Shares is authorized by its articles;
• 2. Bonus Shares are being issued on the recommendation of the
Board and been authorized in the general meeting of the company;
• 3. The Company has not defaulted in payment of interest or
principal in respect of fixed deposits or debt securities issued by it;
• 4. The company has not defaulted in respect of the payment of
statutory dues of the employees, such as, contribution to provident
fund, gratuity and bonus;
• 5. The partly paid-up shares, if any outstanding on the date of
allotment, are made fully paid-up
 Sources of issuing bonus share
• • Sources of Bonus issue
• The bonus issue can be made out of the following –
• Balance in profit and loss account.
• General reserve.
• Capital reserve.
• Balance in Sinking fund reserve.
• Capital redemption reserve account.
• Share premium account.
• Premium received in cash.
• Development rebate reserve.
• Development allowance reserve etc.
• Note – Share premium account and Capital redemption reserve account can be
used to declare fully paid bonus shares only. These two reserves can not be
used for partly paid shares to fully paid shares.
 Advantages of issuing bonus shares
• 1. No cash outflow
• Bonus issue is make without any cash outflow from the company . Cash
saved can be invested in profitable opportunities and the company need
not to procure funds from external sources .
• 2. Useful in financial crisis
• When a company can’t declare a cash bonus because of unsatisfactory
cash position . And it adversely effects on the working capital of the
company then bonus issue can be made .
• 3. To make more attractive to investors
• Bonus issue brings down the market price of company’s shares to make it
more attractive to investors . Lower market price and availability of larger
number of shares increase the trading activity on the stock exchanges .
• 4. Increase in goodwill
• Bonus issue results in the advancement of reputation of the company . It
is taken as a proof of growing earnings and the bright future of the
 Disadvantages of issuing bonus shares
• • Disadvantages of Bonus shares
• In spite of many advantages , the bonus issue suffer from the following
disadvantages :-
• 1. Reduction in future rate of dividend
• The issue of bonus shares leads to a drastic fall in the future rate of dividend as
it is only the capital that increases , not the actual resources of the company .
The earnings don’t usually increase with the bonus issue of shares .
• For example – If a company earns a profit of rs. 2,00,000 against a share capital
of rs. 5,00,000 and the share capital increase by the bonus issue up to rs.
8,00,000 then the rate of dividend falls from 40% to 25% .
• 2. Fall in the market price of shares
• The fall in the future rate of dividend results in the fall of the market price of
shares considerably . This may cause unhappiness among the shareholders .
• 3. No cash inflow
• The company doesn’t receive any cash upon issuing bonus shares . It is a big loss