What is the Bonus Issue of Shares?

Before delving into the reasons and meaning Bonus Issue of Shares, and why companies issue bonus shares, it’s essential to grasp the meaning of bonus shares. My journey to understanding this concept began when, in my fifth year of experience, my Managing Director posed a question to me: “Annu, to increase the number of shareholders, can we issue bonus shares?” This inquiry emerged after April 2023 when the stock exchange introduced a new condition for the migration of SME companies to the main board. Following April 2023, the minimum number of shareholders required for SMEs to migrate to the Main Board was set at 1000. However, my company only had 300 shareholders at that time.

Bonus shares, also referred to as scrip dividends or capitalization issues, represent additional shares granted to existing shareholders of a company at no additional cost. These shares are distributed to shareholders in proportion to their current holdings, thereby augmenting the total number of outstanding shares without altering the company’s net worth.

Why companies issue bonus shares?

Now, let’s explore the primary reasons why companies issue bonus shares:

1. Boosting Share Liquidity: One of the key reasons companies issue bonus shares is to enhance the liquidity of their shares in the market. By increasing the number of outstanding shares through bonus share issuance, companies can potentially attract more investors and traders. Increased liquidity often leads to greater trading activity, which can contribute to price stability and efficiency in the market.

To illustrate, let’s consider the story of XYZ Corporation. XYZ Corporation, a leading player in the tech industry, decides to issue bonus shares to its existing shareholders. As a result, the number of outstanding shares doubles, making XYZ Corporation’s shares more accessible to a broader investor base. This increased liquidity attracts new investors, thereby deepening the market for XYZ Corporation’s shares.

2. Improving Market Perception and Confidence: Issuing bonus shares can also be a strategic move by companies to signal their confidence in future growth prospects and financial health. When a company distributes bonus shares, it sends a positive message to the market, indicating that it has accumulated sufficient reserves and profits to support such a move. This gesture can enhance investor confidence and improve the company’s overall market perception.

Consider the case of ABC Inc., a pharmaceutical company experiencing rapid expansion in its operations. By issuing bonus shares, ABC Inc. communicates its strong financial position and growth trajectory to investors. This fosters a sense of trust and optimism among shareholders and stakeholders, potentially attracting more investment and support for the company’s endeavors.

3. Rewarding Shareholders: Another important reason for issuing bonus shares is to reward existing shareholders for their loyalty and investment in the company. When companies distribute bonus shares, shareholders receive additional ownership stakes in the company without having to invest additional funds. This can be seen as a form of dividend payment in the form of shares rather than cash.

Imagine you’re a shareholder of LMN Enterprises, a reputable manufacturing company. As a token of appreciation for your long-term commitment, LMN Enterprises decides to issue bonus shares to all existing shareholders. This gesture not only reinforces your confidence in the company but also enhances your investment portfolio by increasing your ownership stake in LMN Enterprises.

4. Conservation of Cash: In some cases, companies may opt to issue bonus shares as a means of conserving cash reserves for other strategic initiatives or operational requirements. Instead of distributing cash dividends, which require immediate cash outflows, companies can utilize bonus share issuance to reward shareholders while retaining cash for essential activities such as research and development, expansion projects, or debt repayment.

Let’s examine the scenario of PQR Limited, a retail conglomerate facing the need for significant capital investments to expand its online presence. Rather than depleting its cash reserves by paying cash dividends, PQR Limited decided to issue bonus shares to its shareholders. This allows the company to conserve cash for its ambitious expansion plans while still providing value to its shareholders through additional ownership stakes.

Bonus shares play a crucial role in the corporate landscape, serving various purposes ranging from enhancing share liquidity to rewarding shareholders and signaling financial strength. By understanding why companies issue bonus shares, investors can gain valuable insights into the strategic decisions of companies and make informed investment choices. As companies continue to navigate the dynamic business environment, bonus shares remain a versatile tool for achieving corporate objectives while creating value for shareholders.

Can bonus shares be issued to Preference Shareholders?

Yes, bonus shares can be issued to preference shareholders, although it’s less common than issuing them to common shareholders. Preference shareholders typically hold a different class of shares compared to common shareholders, and their rights and privileges may differ.

When a company decides to issue bonus shares to preference shareholders, it’s essential to ensure that the terms of the preference shares allow for such issuance. Preference shares often come with specific rights, such as a fixed dividend rate or priority in receiving dividends or assets in the event of liquidation. Therefore, the company must carefully review the provisions outlined in the articles of association or other governing documents to determine whether bonus shares can be issued to preference shareholders without violating their rights.

If the terms permit, bonus shares can indeed be distributed to preference shareholders. However, the decision to issue bonus shares to preference shareholders is typically influenced by various factors, including the company’s financial position, shareholder agreements, and legal considerations. Companies must weigh the potential benefits of issuing bonus shares against the impact on existing shareholders and the overall capital structure of the company.

How bonus shares are issued?

Bonus shares, also known as scrip dividends or capitalization issues, are issued by a company to its existing shareholders without any additional cost to them. The process of issuing bonus shares involves several steps:

1. Decision by the Board of Directors: The decision to issue bonus shares is made by the board of directors of the company. This decision is based on various factors such as the company’s financial position, capital requirements, market conditions, and shareholder interests.
2. Authorization: Once the board of directors approves the issuance of bonus shares, it must be authorized by the company’s shareholders through a resolution passed at a general meeting. Shareholders typically vote on the proposal to issue bonus shares, and a certain percentage of votes is required for the resolution to pass, as per the company’s regulations and applicable laws.
3. Determination of Bonus Ratio: The board of directors determines the ratio at which bonus shares will be issued to existing shareholders. This ratio specifies the number of bonus shares that will be allotted for each share held by shareholders. For example, if the bonus ratio is 1:1, shareholders will receive one bonus share for every share they already hold.
4. Record Date: The company sets a record date, also known as the bonus entitlement date, to determine which shareholders are eligible to receive bonus shares. Shareholders who are registered in the company’s books as of this record date are entitled to receive bonus shares.
5. Issuance of Bonus Shares: On the bonus allotment date, the company issues bonus shares to eligible shareholders in accordance with the predetermined ratio. These bonus shares are typically credited to the shareholders’ demat accounts if the company’s shares are held electronically, or physical share certificates are issued if the shares are held in physical form.
6. Notification to Regulatory Authorities: Depending on the jurisdiction in which the company operates, it may be required to notify regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States or the Securities and Exchange Board of India (SEBI) in India, about the issuance of bonus shares.
7. Communication to Shareholders: The company communicates the issuance of bonus shares to its shareholders through official channels, such as press releases, regulatory filings, or announcements on its website. This communication typically includes details about the bonus ratio, record date, and other relevant information.
8. Listing on Stock Exchanges: If the company’s shares are listed on stock exchanges, it ensures that the bonus shares are appropriately listed and traded on these exchanges, following the issuance.

By following these steps, companies can successfully issue bonus shares to their existing shareholders, thereby rewarding them and potentially enhancing shareholder value.

Can We sell bonus shares?

Yes, bonus shares can be sold in the same way as any other shares held by investors. Once bonus shares are issued to shareholders, they become part of their portfolio of holdings and can be sold on the open market through a brokerage account or trading platform.

Here’s how the process typically works:

1. Accessing Bonus Shares: After bonus shares are credited to a shareholder’s account, whether in electronic form in a Demat account or as physical share certificates, the shareholder gains ownership of these shares.
2. Decision to Sell: Shareholders have the discretion to decide whether to hold onto the bonus shares or sell them. This decision may be influenced by factors such as market conditions, the company’s performance, investment objectives, and individual financial goals.
3. Placing Sell Orders: Shareholders who wish to sell their bonus shares can place sell orders through their chosen brokerage firm or trading platform. They specify the number of bonus shares they want to sell and set the desired price at which they are willing to sell.
4. Execution of Sell Orders: When a buyer is found at the specified price, the sell order is executed, and the bonus shares are sold from the seller’s account. The transaction is typically settled within the timeframe prescribed by the relevant securities regulations.
5. Receipt of Proceeds: Upon the successful sale of bonus shares, the shareholder receives the proceeds of the sale, minus any brokerage fees or transaction costs incurred. These proceeds are typically credited to the shareholder’s brokerage account or bank account linked to the trading platform.
6. Confirmation of Sale: The shareholder receives confirmation of the sale transaction, detailing the number of bonus shares sold, the selling price, and any associated charges. This confirmation serves as a record of the transaction.

By selling bonus shares, shareholders have the opportunity to realize gains or losses based on the difference between the selling price and the acquisition cost of the bonus shares. Additionally, selling bonus shares can provide liquidity to investors who may wish to convert their equity holdings into cash or rebalance their investment portfolios.

How bonus shares will be credited?

The crediting of bonus shares to shareholders typically depends on whether the shares are held in electronic form (dematerialized) or physical certificates. Here’s how bonus shares are usually credited:

1. Dematerialized (Electronic) Shares:
   • For shareholders who hold their shares in electronic form through a demat account, the bonus shares are typically credited directly to their demat accounts.
   • Once the company issues bonus shares, the Registrar and Transfer Agent (RTA) of the company, or the depository participant (DP) with whom the shareholder maintains their demat account, will update the shareholder’s demat account with the additional shares.
   • Shareholders can view the credited bonus shares in their demat account statement, which provides details of their updated shareholding after the bonus issuance.
2. Physical Share Certificates:
   • For shareholders who hold physical share certificates, the process of crediting bonus shares involves issuing additional physical certificates.
   • The company’s registrar or transfer agent will issue new share certificates reflecting the bonus shares to eligible shareholders.
   • These physical share certificates are then dispatched to the shareholders’ registered addresses as per the company’s records.
   • Upon receiving the physical share certificates, shareholders should ensure that they are duly signed and stamped, and they may need to retain these certificates securely.

In both cases, whether electronic or physical, shareholders will receive notification from the company or its registrar regarding the crediting of bonus shares. This notification typically includes details such as the number of bonus shares credited, the bonus ratio, the record date, and any other relevant information about the bonus issuance.

It’s important for shareholders to verify the accuracy of the bonus shares credited to their accounts and to retain documentation related to the bonus issuance for their records. Additionally, shareholders should update their records and notify their brokers or depository participants in case of any discrepancies or issues with the crediting of bonus shares.

Checklist for a bonus issue:

1. Legal Compliance:
   • Ensure compliance with company laws, regulations, and the company’s articles of association regarding the issuance of bonus shares.
   • Verify that the proposed bonus issue meets the requirements stipulated by regulatory authorities.
2. Board Approval:
   • Obtain approval from the board of directors for the bonus issue.
   • Document the board resolution authorizing the bonus issue.
3. Shareholder Approval:
   • Seek approval from shareholders through a resolution passed at a general meeting.
   • Provide shareholders with sufficient information about the bonus issue, including the bonus ratio and the rationale behind the issuance.
4. Record Date:
   • Determine the record date, also known as the bonus entitlement date, to identify shareholders eligible to receive bonus shares.
   • Ensure compliance with regulatory requirements regarding the announcement and recording of the record date.
5. Bonus Ratio:
   • Determine the bonus ratio, specifying the number of bonus shares to be issued for each share held by shareholders.
   • Calculate the bonus ratio based on factors such as the company’s financial performance, capital structure, and shareholder interests.
6. Communication:
   • Notify shareholders about the bonus issue, including details such as the bonus ratio, record date, and procedure for receiving bonus shares.
   • Communicate the bonus issue to regulatory authorities and other relevant stakeholders as required by applicable laws and regulations.
7. Documentation:
   • Prepare necessary documentation, including notices, circulars, and resolutions related to the bonus issue.
   • Maintain accurate records of the bonus issue process, including board and shareholder approvals, regulatory filings, and communications with stakeholders.
8. Issuance of Bonus Shares:
   • Coordinate with the company’s registrar and transfer agent or depository participant to facilitate the issuance of bonus shares.
   • Ensure timely crediting of bonus shares to eligible shareholders’ accounts or issuance of physical share certificates as applicable.
9. Listing and Trading:
   • Ensure that bonus shares are appropriately listed and traded on stock exchanges where the company’s shares are listed.
   • Coordinate with stock exchanges and regulatory authorities to comply with listing requirements and trading guidelines for bonus shares.
10. Post-Issue Compliance:
    • Monitor post-issue compliance requirements, such as disclosure obligations, reporting obligations, and any additional regulatory requirements.
    • Address any inquiries or concerns raised by shareholders or regulatory authorities regarding the bonus issue.

By following this checklist, companies can effectively plan, execute, and comply with the requirements associated with a bonus issue, thereby enhancing transparency, governance, and shareholder confidence in the process.

Can bonus shares be issued at a premium?

Yes, bonus shares can be issued at a premium, although it’s relatively uncommon. Bonus shares are typically issued to existing shareholders without any additional cost to them, which means they are usually issued at par value or a discount to the prevailing market price. However, in some cases, companies may choose to issue bonus shares at a premium, albeit for specific reasons and under certain circumstances.

Here are a few scenarios where bonus shares might be issued at a premium:

1. Legal Provisions: In some jurisdictions, companies may be permitted to issue bonus shares at a premium if it’s explicitly allowed by the relevant laws, regulations, or the company’s articles of association. These provisions may provide flexibility for companies to issue bonus shares at a premium under certain conditions.
2. Strategic Considerations: Companies may opt to issue bonus shares at a premium as part of a strategic initiative or corporate restructuring. For example, if a company wishes to reward its shareholders while also raising additional capital, it may issue bonus shares at a premium to achieve both objectives simultaneously.
3. Market Perception: Issuing bonus shares at a premium could signal confidence in the company’s future prospects and financial health. It may be perceived positively by investors as a demonstration of the company’s strong performance and growth potential.
4. Capital Structure Optimization: In cases where the company aims to optimize its capital structure or adjust its share price to a desired level, issuing bonus shares at a premium may be a strategic choice. This approach can help the company achieve specific capitalization goals while maintaining control over its share price dynamics.
5. Enhanced Shareholder Value: By issuing bonus shares at a premium, the company effectively provides additional value to existing shareholders beyond the intrinsic value of the shares. This can be viewed as a gesture of appreciation to shareholders and a means of enhancing shareholder returns.

It’s important to note that issuing bonus shares at a premium may involve additional complexities and considerations compared to issuing them at par value or a discount. Companies must carefully evaluate the implications of such a decision, including legal, financial, and shareholder-related aspects, before proceeding with the issuance of bonus shares at a premium. Additionally, regulatory approval or shareholder consent may be required depending on the jurisdiction and circumstances surrounding the issuance.

References

https://en.wikipedia.org/wiki/Bonus_share