Reasons for issuing Bonus Shares

Bonus Shares are additional shares issued by a company to its existing shareholders free of cost, in proportion to their current holdings. Companies issue bonus shares for several strategic and financial reasons.

• Capitalization of Reserves

A company accumulates substantial reserves over time through retained earnings. Instead of distributing these reserves as cash dividends, the company can convert them into share capital by issuing bonus shares. This strengthens the company’s financial position and utilizes idle reserves effectively. By doing so, the company maintains its liquidity while rewarding shareholders. This also prevents excessive accumulation of profits, ensuring that earnings are productively reinvested. Additionally, it demonstrates financial stability, which enhances investor confidence in the company’s long-term sustainability and profitability.

• Enhancing Market Perception

Issuing bonus shares can improve investor confidence and create a positive perception of the company in the stock market. When a company distributes bonus shares, it signals strong financial health and growth potential. This action increases investor trust and can attract new investors, leading to an overall improvement in the company’s stock valuation. The increase in issued capital without any cash outflow reflects the company’s profitability, reinforcing its reputation. Moreover, regular bonus issues indicate consistent performance, encouraging long-term investments from shareholders and institutional investors.

• Increasing Liquidity of Shares

Bonus shares help increase the number of outstanding shares in the market, improving the stock’s liquidity. Higher liquidity ensures that shares can be easily bought and sold, reducing volatility and making the stock more attractive to investors. This benefits shareholders, as increased liquidity leads to better price discovery and reduces the impact of large trades on stock prices. Moreover, enhanced liquidity can attract institutional investors and traders, resulting in a more active market for the company’s shares. Over time, this increased trading volume can contribute to a more stable stock price.

• Making Shares More Affordable

The price of a company’s shares may become too high, making them less accessible to retail investors. Issuing bonus shares reduces the per-share price while maintaining the total value of an investor’s holdings. This affordability increases demand, attracting small and retail investors who previously found the stock expensive. A lower share price also enhances market participation, leading to greater trading activity. Furthermore, this strategy helps maintain a broad shareholder base, ensuring that ownership is not concentrated among a few large investors, which contributes to better corporate governance.

• Rewarding Long-Term Shareholders

Bonus shares serve as a reward for loyal, long-term shareholders. Since they are issued free of cost, existing investors benefit without having to invest additional capital. This increases investor satisfaction and encourages long-term holding, reducing frequent stock trading and stabilizing the shareholder base. Long-term investors gain additional shares proportionate to their existing holdings, increasing their total investment value. Additionally, rewarding shareholders in this way strengthens investor relations and reinforces their confidence in the company’s ability to generate consistent profits over time.

• Reducing Dividend Payout Pressure

If a company prefers to retain cash for expansion, debt repayment, or other operational needs, issuing bonus shares can be an alternative to cash dividends. Instead of distributing profits as cash, the company converts them into additional shares, ensuring that reserves are effectively utilized without impacting cash flow. This strategy allows companies to maintain financial flexibility while still rewarding shareholders. It also reduces the company’s immediate tax burden and helps maintain liquidity for future investments. For shareholders, bonus shares represent a long-term value gain, as they may appreciate over time.

• Compliance with Regulatory Requirements

Certain financial regulations or stock exchange requirements mandate that companies maintain a minimum share capital. Issuing bonus shares helps a company meet these regulatory standards without raising new funds from external investors. This ensures compliance while avoiding dilution of existing shareholders’ stakes. Additionally, it helps companies strengthen their balance sheets, which may be necessary for securing loans or expanding business operations. Compliance with regulatory norms also enhances the company’s reputation, signaling to investors and stakeholders that the company is financially sound and well-managed.

• Improving Earnings per Share (EPS) Stability

Bonus shares help maintain earnings per share (EPS) stability over time by distributing profits efficiently among shareholders. While the total earnings remain unchanged, the per-share earnings may decrease temporarily due to an increase in outstanding shares. However, as the company continues to grow, EPS improves, benefiting shareholders in the long run. Moreover, stable EPS figures make a company’s financial performance appear consistent, which can positively influence investor confidence. Over time, a strong EPS trend can result in a higher stock valuation and better financial credibility in the market.