Bonus Issue (Scrip Issue)

What is a Bonus Issue (Scrip Issue)?

A bonus issue, also referred to as a scrip issue, involves a company issuing additional shares to its current shareholders at no extra cost, based on the number of shares the shareholders already own. This type of issue increases the total number of shares owned by shareholders, but it does not increase the overall market capitalization of the company. Instead, the share price adjusts accordingly, maintaining the total market value of the company at a constant level post-issuance.

Key Features of a Bonus Issue:

No Additional Cost: Shareholders receive additional shares without any financial outlay.
Proportional Distribution: The new shares are distributed in proportion to existing holdings. For example, a 1:3 bonus issue means shareholders get one new share for every three shares they already own.
Market Capitalization: The overall market capitalization of the company remains unchanged as the total share count increases, while the share price typically decreases proportionally.
Signal of Confidence: A bonus issue can be seen as a positive signal, indicating the company’s confidence in its future prospects.

Examples of Bonus Issues

Example 1:

ABC Corporation announces a 1:2 bonus issue, meaning shareholders will receive one additional share for every two shares they own. If a shareholder holds 100 shares before the bonus issue, they will receive 50 additional shares, bringing their total to 150.

Example 2:

XYZ Ltd. declares a 2:5 bonus issue. Shareholders will receive two additional shares for every five shares held. For a shareholder with 200 shares before the issue, they will receive 80 additional shares, resulting in a total of 280 shares after the bonus issue.

Frequently Asked Questions (FAQs)

1. Why do companies issue bonus shares?

Companies issue bonus shares to reward their shareholders, increase stock liquidity, and signal company growth and confidence in its future prospects.

A bonus issue increases the total number of shares, which usually results in a proportional decrease in the share price to maintain the same market capitalization.

Yes, a bonus issue typically decreases the EPS since the number of outstanding shares increases while net earnings remain the same.

4. Are bonus shares taxable?

Under certain tax jurisdictions, bonus shares may be subject to capital gains tax when sold.

5. Do bonus issues dilute my ownership in the company?

No, bonus issues do not dilute ownership; they proportionally increase all shareholders’ stakes, leaving ownership percentages unchanged.

Scrip Dividend:

A scrip dividend allows shareholders to receive dividends in the form of additional shares rather than cash. Unlike a bonus issue, a scrip dividend can offer shareholders an option between cash and shares.

Stock Split:

A stock split increases the number of shares outstanding by issuing more shares to current shareholders. Unlike a bonus issue, a stock split involves lowering the share price and increasing share quantity proportionally without altering ownership value.

Rights Issue:

A rights issue allows existing shareholders to buy additional shares at a discount before the new shares are offered to the public. This typically requires a financial outlay from shareholders, unlike a bonus issue.

Online References

Suggested Books for Further Studies

“Financial Accounting: An Introduction” by Pauline Weetman
- A comprehensive textbook perfect for understanding the fundamentals of financial accounting, including topics like bonus issues.
“Corporate Finance” by Jonathan Berk and Peter DeMarzo
- This book covers various corporate financial strategies and practices, providing deep insights into stock market activities, including bonus issues.
“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- A go-to reference book for corporate finance principles, offering detailed explanations on financial decisions related to equity and shareholder value.

Accounting Basics: “Bonus Issue” Fundamentals Quiz

### Why might a company decide to issue bonus shares? - [x] To reward existing shareholders - [ ] To attract new investors - [ ] To meet regulatory requirements - [ ] To reduce debt > **Explanation:** A company may issue bonus shares primarily to reward existing shareholders by increasing their shareholdings at no extra cost. ### Is the total market capitalization of a company affected by a bonus issue? - [ ] Yes, it increases - [ ] Yes, it decreases - [ ] Yes, it fluctuates - [x] No, it remains the same > **Explanation:** The market capitalization remains the same in a bonus issue as the increase in the number of shares is counterbalanced by a proportional decrease in share price. ### What is the typical effect of a bonus issue on the stock price? - [ ] It stays the same - [x] It decreases proportionally - [ ] It increases proportionally - [ ] It fluctuates unpredictably > **Explanation:** In a bonus issue, the stock price generally decreases proportionally to the increase in the number of shares to maintain the same market capitalization. ### In a 1:2 bonus issue, how many additional shares will you get if you own 50 shares originally? - [ ] 10 shares - [ ] 20 shares - [x] 25 shares - [ ] 50 shares > **Explanation:** In a 1:2 bonus issue, you receive one additional share for every two shares owned. Hence, owning 50 shares, you will get 25 additional shares. ### Does a bonus issue involve any cost to the shareholder? - [ ] Yes, an upfront cost - [ ] Yes, a hidden fee - [x] No, there is no cost - [ ] Yes, a tax cost > **Explanation:** A bonus issue does not involve any cost to the shareholder as it is the free distribution of additional shares based on existing shareholdings. ### How does a bonus issue affect the Earnings Per Share (EPS)? - [x] It decreases EPS - [ ] It increases EPS - [ ] It keeps EPS the same - [ ] It fluctuates EPS unpredictably > **Explanation:** The EPS decreases as the number of shares increases, diluting the earnings attributable to each share, while the net earnings remain the same. ### What type of signal can a bonus issue send to the market? - [x] Confidence in future prospects - [ ] Liquidity issues - [ ] Declining revenue - [ ] Debt restructuring > **Explanation:** A bonus issue can signal to the market that the company is confident in its future prospects and financial health, which may enhance investor sentiment. ### What is a scrip dividend? - [ ] A new taxation policy - [ ] A preferred stock issuance - [x] An option to receive dividends in shares - [ ] A rights issue > **Explanation:** A scrip dividend allows shareholders to receive their dividends in the form of additional shares instead of a cash payout. ### During a bonus issue, what remains unchanged for shareholders? - [ ] Number of shares - [ ] Market value of shares - [x] Percent ownership in the company - [ ] Earnings per share > **Explanation:** The percent ownership of each shareholder remains unchanged in a bonus issue, as all shareholders receive additional shares proportionally. ### Can bonus shares be sold in the market? - [ ] No, they cannot be sold - [x] Yes, after they are allotted and listed - [ ] Only after a year - [ ] Yes, but only to other existing shareholders > **Explanation:** Bonus shares can be sold in the market once they are allotted and listed, just like regular shares, providing liquidity to the shareholders.

Thank you for exploring the concept of bonus issues with us and testing your understanding through our quiz! Continue honing your financial acumen for a successful career in accounting and finance!