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What Is Bonus Shares In Accounting

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What Is Bonus Shares In Accounting

What Are Bonus Shares? #

Bonus shares are extra shares a company gives to its existing shareholders for free. Instead of paying them cash dividends, the company rewards them with additional shares. This process helps companies grow without spending cash.

If you own 10 shares in a company and it announces a 1:1 bonus issue, you will get 10 more shares for free.

Why Do Companies Issue Bonus Shares? #

Many companies in India, including small businesses, use bonus shares as a financial strategy. Here’s why:

  • Saves Cash: Instead of paying cash to shareholders, companies keep their money for daily operations and future growth.
  • Builds Investor Confidence: Giving bonus shares shows that a company is financially strong, attracting more investors.
  • Makes Shares Cheaper: When a company gives bonuses, the number of shares goes up, and the share price goes down. This makes it easier for new investors to buy shares.
  • Encourages Long-Term Investments: Investors may hold on to their shares if they think the company will grow in the future.

Key Features of Bonus Shares #

  • No Extra Payment Needed: Bonus shares are free, so shareholders don’t have to invest more money to get them.
  • Keeps Company Cash Safe: Companies do not pay in cash. They can use their money for business needs. This includes buying equipment, hiring employees, or expanding operations.
  • Given in a Fixed Ratio: Bonus shares are issued in a set ratio. For example, in a 2:1 bonus issue, a shareholder with 50 shares will get 100 extra shares. This keeps ownership balanced.
  • Affects Company’s Equity: A company issues bonus shares from its earnings. Even though the number of shares increases, the company’s total value remains the same.
  • Follows Government Rules: In India, companies must follow rules set by SEBI (Securities and Exchange Board of India). This ensures that shareholders are treated fairly.

Advantages of Bonus Shares for Small Businesses #

  •  Increases Shareholder Trust: When a company offers bonus shares, it shows growth and financial stability. This boosts investors’ trust.
  •  Improves Market Reputation: A company that gives bonus shares can build a strong market image. This helps attract new investors. 
  • Helps Manage Business Finances: Companies can use bonus shares instead of paying cash dividends. This way, they can keep earnings and invest in their business. 
  • Encourages Investment Without Borrowing: Small businesses can use bonus shares to attract investors. This way, they avoid loans and extra debt.
  • Lower Stock Price Boosts Trading: A lower stock price can attract more buyers. This can increase trading activity in the market.

How a Small Business Can Issue Bonus Shares #

  • Board Approval: The company’s board of directors must first approve the bonus share proposal. They need to check if the company has enough earnings to give out shares.
  • Shareholder Approval: After the board approves, company shareholders must agree to the bonus issue in a meeting.
  • Prepare Necessary Documents: The company must file the necessary documents with SEBI to follow legal guidelines.
  • Decide the Record Date: The company sets a “record date.” Shareholders who own shares by this date will get bonus shares.
  • Update Records: The company updates its shareholder records to distribute the new shares correctly.
  • Announce to the Public: A company makes an official announcement so investors know about the bonus shares.
  • Distribute the Shares: Finally, the bonus shares are credited to the shareholders’ accounts.

Common Challenges in Issuing Bonus Shares #

  • Understanding the Legal Process: Companies must follow corporate laws, which can be confusing without legal help.
  • Shareholder Expectations: Some investors prefer cash dividends instead of shares, so proper communication is necessary.
  • Stock Price Fluctuations: The stock price can change when a company issues bonus shares, sometimes causing short-term instability.
  • More Work for Record-Keeping: Issuing bonus shares requires accurate data entry and management, increasing administrative tasks.
  • Communication with Investors: Companies should ensure that investors understand why bonus shares are issued and how they benefit.

Best Practices for Offering Bonus Shares #

  • Analyze Financials Carefully: A business should review its earnings and reserves before issuing bonus shares.
  • Communicate Clearly with Shareholders: Businesses should share updates in simple terms.
  • Follow Legal Guidelines: Complying with SEBI regulations ensures a smooth process and avoids penalties.
  • Educate Shareholders: Providing basic education about bonus shares helps investors make informed decisions.
  • Use Technology for Better Management: Accounting software, helps small businesses track shareholder data easily.

Real-Life Examples  #

Making Shares More Affordable

A tech startup experienced rapid growth, causing its stock price to become too high for small investors. By issuing bonus shares (2:1 ratio), the company reduced the share price, making it more accessible. This led to higher trading volumes and new investor participation.

Retaining Earnings for Expansion

A pharmaceutical business wanted to expand operations but needed to preserve cash for research. Instead of paying cash dividends, it rewarded shareholders with bonus shares. This allowed the company to fund expansion while keeping investors satisfied.

FAQ’s: #

What are bonus shares?

Bonus shares are free additional shares given by a company to its existing shareholders instead of cash dividends.

Why do companies issue bonus shares?

Companies issue bonus shares to conserve cash, boost investor confidence, and make shares more affordable.

How does a bonus issue affect stock price?

A bonus issue adds more shares. This usually lowers the stock price but keeps the company’s total value the same.

Are bonus shares taxable in India?

Investors do not pay tax when they receive bonus shares, but they must pay capital gains tax when they sell them.

What is the difference between bonus shares and dividends?

Bonus shares provide additional stock, whereas dividends offer cash payouts to shareholders.

Conclusion #

Bonus shares are a powerful tool for small businesses in India. They help companies reward shareholders, boost market trust, and manage finances smartly.