Bonus Share - Meaning, Types, Advantages | My Espresso

What is Bonus Share: Meaning, Types and Benefits Explained

Even though they are profitable, businesses cannot pay up their accumulated profits in the form of dividends. They provide bonus shares to all their current shareholders. These bonus shares are provided in proportion to the shareholder's existing holding levels.

Published on 16 December 2022

Enterprises that have completely dried up their liquidity and are experiencing a shortage in funds resort to bonus shares. Doing so will help them reward all the shareholders. Now, let's find out more through this post about what is bonus share and who is eligible for bonus shares in detail.

What is Bonus Shares?

So, what is bonus share? It's a medium through which all the businesses get to convert their accumulated funds into share capital. So, when you issue bonus shares, it helps save the business from liability to pay up the dividends. It's imperative to understand that these shares do not involve the flow of money from in and out of the business. The net asset base of the business stays intact, and only the share capital gets changed.

The Various Types of Bonus Shares

To have a good understanding of what is bonus share, you need to learn about their types. You will come across two types of bonus shares, which are:

1.    Partly Paid Bonus Shares

When it comes to these types of bonus shares, you don't have to pay a single penny. The partly-paid shares are provided when the business wants to transform all its existing partly-paid shares into fully-paid ones. The partly paid shares are shares on which the business demands the remaining funds from all the customers.

2.    Fully Paid Bonus Shares

When the shareholders are provided with bonus shares in the form of proportions for their existing holdings, it is known as fully paid shares. To issue this type of share, a business can use its balances from the following:

  • Capital redemption reserves.
  • Capital reserves
  • Loss and profit accounts
  • Security premium accounts
  • Many more

Bonus Shares for Investors: The Benefits

There are some unique benefits of bonus shares, which all the investors will surely receive. These are:

  1. No Implications: These shares do not attract any tax consequence when it's sold after keeping them on hold for over 12 months. Besides that, when the bonus shares get credited to the shareholder's Demat accounts, they don't have to pay up taxes for the shares they received.
  2. Ideal for Investors: Bonus shares are extremely beneficial for all the investors who believe that the business will flourish in the long run and will bring in a lot of returns to their investments.

Why Do Businesses Issue Bonus Shares?

You already know what is bonus share, but now you're thinking about why businesses issue them in the first place. They do so because they don't want any of their shareholders to lose their faith in them.

When these types of shares are issued, it can help businesses to capitalize on all their reserves. Restructuring of the drawback also takes place when the reserves get depleted, and equity capital equally increases. All these shares are provided against the profits produced by the business.

This increases the equity capital and reduces the loss and profit account. Once you learn what is bonus share are, you will get a clear idea that these shares are steady income for the shareholders offered by the business. It's provided as a return delivered to all the shareholders that have shares in a particular organization.

Features of the Bonus Shares

Bonus shares have some unique features, and you might have never heard about them. These features are:

  • The issue of all the Bonus Shares helps in promoting a company's goodwill among all the possible investors and shareholders.
  • You will not encounter changes within the shareholding pattern post a bonus issue because the allotment of these shares has been done pro-rata.
  • The shares of a business falls during the post-bonus issue. This gives an opportunity to all the retail investors because they are purchasing the shares of the company.
  • After the bonus is issued, the share's liquidity receives a push by the number of outstanding shares.
  • These types of shares are issued once every 12 months, and it has elapsed since its last issue. You will come across two bonus issues that are permitted in 5 years. Otherwise, all the businesses will misuse the opportunity to avoid paying dividends.

Conclusion

Once you have a good understanding of what is bonus, it will become easier to take care of all the shareholders. It's mainly because these shares are provided to them when the business has the funds to pay up the dividends. But the shareholders will only receive these shares when they hold shares in the company. The Bonus Shares also promote the goodwill of the business among all the shareholders and investors, and they are also issued once every 12 months.

Chandresh Khona
Team Espresso

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