A company issues bonus shares to its existing shareholders instead of paying a dividend. These shares are given to the current shareholders on the basis of their existing holding in the company. Bonus shares are given out of the profits or reserves of the company. The reserves in the form of accumulated profits are typically expected to be distributed as dividend. The issue of bonus shares results in increase in the total shares of the company keeping the market capitalisation for value of anyone’s portfolio same. Corporate process has to be followed. No Tax is payable by the recipients of the bonus shares.
When are bonus shares issued? Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders due to shortage of funds in spite of earning good profits for that period. When the company converts them into equity capital, it indicates the the confidence of the management in the growth of the company. Bonus issue has a psychological value for the shareholders. For a listed company, the number of shares listed on the stock exchange increases and the price per share falls in line with the bonus ratio. This makes it easy to trade in that stock.