by Bonus issues refer to the distribution of additional shares to existing shareholders at no extra cost, based on their current holdings. These shares are issued from a company’s free reserves or securities premium, converting retained earnings into share capital. Bonus issues increase the total number of shares while keeping the proportionate ownership unchanged. They enhance market liquidity, investor confidence, and perceived financial strength without affecting the company’s cash reserves. However, the market price per share adjusts downward post-issue. Bonus issues are governed by SEBI guidelines and the Companies Act, 2013 in India.
Types of Bonus Issues:
1. Capitalization of Reserves (Bonus Shares from Reserves)
Capitalization of reserves refers to the process where a company converts its accumulated reserves into share capital and issues bonus shares to existing shareholders. Instead of distributing cash dividends, the company allocates additional shares to shareholders in proportion to their existing holdings. These reserves may include free reserves, securities premium reserves, or capital redemption reserves, but not revaluation reserves.
The advantage of this approach is that it enhances investor confidence while maintaining liquidity within the company. By issuing bonus shares, the company increases its share capital without affecting cash flow. However, since bonus shares do not bring additional funds into the company, they do not improve financial strength directly. The market price of shares generally adjusts downward after a bonus issue, ensuring that shareholders’ wealth remains unchanged.
Companies opt for capitalization of reserves when they wish to reward shareholders, improve liquidity, or maintain an investor-friendly image while retaining earnings for future expansion.
2. Bonus Issues out of Free Reserves vs. Capital Reserves
Bonus shares can be issued from free reserves or capital reserves, each having distinct characteristics.
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Bonus from Free Reserves: Companies commonly issue bonus shares from free reserves, retained earnings, or securities premium. These reserves represent accumulated profits, making them ideal for rewarding shareholders. Since these are earned profits, SEBI permits issuing bonus shares from them. It reflects a company’s strong financial performance and long-term stability.
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Bonus from Capital Reserves: Capital reserves arise from non-operating profits, such as asset revaluation or government grants. SEBI restricts issuing bonus shares from revaluation reserves, as they do not represent real earnings. Companies can issue from capital redemption reserves, which arise when preference shares are redeemed.
