What Is Bonus Issue?

A Bonus Issue, also known as a scrip issue or capitalization issue, refers to the process of a company distributing additional shares to its existing shareholders without any extra cost, based on the number of shares already held.

Historical Context

The concept of a bonus issue has its roots in the practices of early financial markets, where companies sought ways to reward shareholders without expending cash reserves. This approach became more structured with the development of modern stock exchanges and regulations, providing a strategic method for companies to capitalize on retained earnings by converting them into equity.

Types of Bonus Issues

• Pro Rata Basis: Shares are allotted in a fixed ratio relative to existing holdings, such as 1:2 (one bonus share for every two shares held).
• Cum Bonus: Shares that are eligible for the upcoming bonus issue.
• Ex Bonus: Shares traded after the announcement of a bonus issue, where the share price adjusts to reflect the bonus.

Key Events and Detailed Explanations

Issuance Process:

• Board Approval: The company’s board of directors proposes the bonus issue.
• Shareholder Approval: Approval from shareholders is typically required.
• Regulatory Filing: Compliance with local stock exchange and regulatory requirements.
• Record Date: Date on which shareholders must own shares to be eligible.
• Distribution Date: Actual issuance of the bonus shares.

Effect on Share Price: The share price usually adjusts downward to reflect the increase in the number of shares, preserving the market capitalization and value of each shareholder’s investment.

Mathematical Models

Formula for Adjusted Share Price:

$$ \text{Adjusted Share Price} = \frac{\text{Previous Share Price}}{1 + \text{Bonus Ratio}} $$

Example: If the previous share price is $100 and the bonus issue is 1:2, the adjusted share price would be:

$$ \text{Adjusted Share Price} = \frac{100}{1 + \frac{1}{2}} = \frac{100}{1.5} = 66.67 $$

Charts and Diagrams

    graph TB
	    A[Company Profits] --> B[Retained Earnings]
	    B --> C[Capital Reserves]
	    C --> D[Bonus Issue]
	    D --> E[New Share Distribution]
	    E --> F[Shareholder Portfolio]
	    F --> G[Adjusted Share Price]

Importance and Applicability

Importance:

• Increases Liquidity: More shares in the market can enhance trading activity.
• Investor Confidence: Rewarding shareholders can improve company reputation.
• Utilization of Reserves: Converts retained earnings into share capital without impacting cash flow.

Applicability:

• Listed Companies: Most common among publicly traded companies.
• Strategic Rewards: Used as a tool to reward loyal investors.

Examples

• Infosys Limited: Announced multiple bonus issues over the years, enhancing shareholder value.
• Reliance Industries: Known for its periodic bonus issues to maintain investor confidence.

Considerations

• Dilution: Although not dilutive to ownership percentage, the number of shares outstanding increases.
• Market Perception: Can be perceived positively if aligned with strong performance, or negatively if seen as a distraction.

Related Terms with Definitions

• Scrip Issue: Alternative term for bonus issue.
• Rights Issue: Issuance of shares to existing shareholders but requires payment.
• Stock Split: Increase in the number of shares with corresponding reduction in share price, unlike bonus issues which allocate new shares.

Comparisons

Bonus Issue vs. Stock Split:

• Bonus Issue: Involves conversion of reserves to equity without changing par value.
• Stock Split: Involves subdividing existing shares, changing the par value proportionally.

Interesting Facts

• No Cash Outflow: Companies do not need to expend cash reserves.
• Psychological Boost: Can provide a psychological boost to investors, reflecting company growth.

Inspirational Stories

Warren Buffett on Bonus Issues: Warren Buffett has historically avoided issuing bonus shares at Berkshire Hathaway, preferring to reinvest profits directly into the business, demonstrating the philosophy that not all companies view bonus issues as advantageous.

Famous Quotes

• John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.”
• Reflects the dynamic nature of stock markets where strategies like bonus issues play a role.

Proverbs and Clichés

• “Don’t put all your eggs in one basket.”
• Highlights the importance of diversification, even as companies issue bonus shares.

Expressions, Jargon, and Slang

• “Going Ex-Bonus”: Refers to the share trading without the entitlement to the bonus issue.
• “Dilution without Confusion”: Informal way to describe the nature of bonus issues.

FAQs

• What is a bonus issue? A bonus issue is the distribution of additional shares to existing shareholders without any cost.

• Why do companies issue bonus shares? To reward shareholders, increase liquidity, and capitalize retained earnings.

• How does a bonus issue affect share price? The share price typically adjusts downward to account for the increased number of shares, keeping the overall market capitalization stable.

References

• Investopedia: Definition and explanation of bonus issues.
• NSE India: Rules and regulations for issuing bonus shares in India.
• Financial Times: Analysis of bonus issue impacts on stock markets.

Summary

A bonus issue, also known as a scrip or capitalization issue, is a strategic financial maneuver where a company distributes additional shares to its existing shareholders without any cost, based on their current holdings. It increases share liquidity, boosts investor confidence, and effectively utilizes reserves, though it requires careful consideration of market perceptions and potential implications on share dilution. With historical significance and practical applicability, bonus issues remain a vital tool in corporate finance.