BONUS SHARES 1

8/7/2019 BONUS SHARES 1

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INTRODUCTION:

The Oxford English Dictionary gives the meaning of bonus shares as; “an extra dividend

paid to share holders in a joint stock company from surplus profits”. In legal context, a

bonus share is not a dividend. The guidelines issued by the ministry of Finance prohibit

declaration of bonus shares in lieu of dividends. Bonus shares may be issued in addition

to dividends. In bonus issue, shares are issued to existing shareholders as a gift i.e

without charging any payment.

STOCK SPLIT-UPS:

Stock split-ups involves reduction of the par value of the stock which leads to merely

increase in the number of outstanding shares. There is no change in the total stated value

of the stock or in the surplus. It has no effect on the shareholders equity.

Objectives of Stock split-ups:

(a) To reduce the unit market price of the shares by increasing the number of outstanding

Shares.

(b) To conceal the distribution of large profits by reducing the rate per share.

(c) To provide a broader and stable market for the company’s shares.

(d) To prepare for corporate mergers.

(e) To please the shareholder, since split-ups are taken as an indicator of the financial

success of a corporation.



The Effect Of Stock Split On The Balance Sheeet

In the above case, each share of the face value of Rs.100 were split-up into 10shares of

Rs.10 each. The result of the stock split is the increase in the number of outstanding

shares with no corresponding change in the total equity capital.

CONSOLIDATION OF SHARES

Consolidation of shares involves increasing of the par value of the stock which leads to

merely decrease in the number of outstanding shares. There is no change in the total

stated value of the stock or in the Surplus. It has no effect on the shareholders equity.

Objectives of Consolidation of shares:

(a) To increase the unit market price of the shares by reducing the number of outstanding

Shares.

(b) To increase the rate of dividend per share.

(c) To reduce the number of outstanding shares in circulation.

The Effect Of Consolidation Of Shares On Balance Sheet

i) Before the stock split Rs

Equity Share Capital(10,000 shares of Rs.100 each fully paid)

General Reserve

Total

10,00,000

15,00,000

25,00,000

ii) After the stock split

Equity Share Capital(1,00,000 shares of Rs.10 each fully paid)

General Reserve Total

10,00,000

15,00,000

25,00,000



In the above case, the 1,00,000 shares of the face value of rs.10 each were consolidated

into 10,000 shares of Rs. 100 each. The result of the consolidation is the decrease in the

number of outstanding shares with no corresponding change in the total equity capital.

Stock –split is issue of shares of smaller denomination in place of shares of large

denomination. Number of shares goes up. Share Capital is not affected. Consolidation of

shares is converting shares of smaller denomination into those of a larger Denomination.

number of shares comes down. Share Capital is not affected.

The Effect of Bonus Issue on The Equity Portion of The Balance Sheet

i) Before the Consolidation Rs

Equity Share Capital(1,00,000 shares of Rs.10 each fully paid)

General Reserve

Total

10,00,000

15,00,000

25,00,000

ii) After the Consolidation

Equity Share Capital(10,000 shares of Rs.100 each fully paid)

General Reserve Total

10,00,000

15,00,000

25,00,000



The result from the issue of bonus shares is the increase in the number of shares

outstanding. In the equity portion of the firm, a bonus issue reduces the retained earnings

and correspondingly increases paid-up equity share capital.

Retained Earnings and Bonus Issue

Retained earnings are an important source of internal financing in company used by

Established companies. Retained earnings act as a stabilizer in the capital structure of a

Firm. It enables the firm to face the Fluctuations whether seasonal or due to working of

trade cycle. It is an important source of working capital also.

The process of accumulating corporate profits gradually and their utilization in business

is technically termed as retained earnings or internal financing. Such earnings can be

retained in the business either in the form of credit balance of profit and loss account or

in general reserves, etc. this policy of using retained earnings in the business is generally

i) Equity Portion Before The Bonus Issue

Equity share capital (30,000 shares of Rs.100 each)

Securities Premium

Retained Earnings

Amount(Rs)

30,00,000

7,50,000

62,50,000

Total Equity 1,00,00,000

ii) Equity Portion After The Bonus Issue (1:2 ratio)

(Bonus : Existing Shares)

Equity share capital (45,000 shares of Rs.100 each)

Securities Premium

Retained Earnings

Amount(Rs)

45,00,000

7,50,000

47,50,000

Total Equity 1,00,00,000



known as ‘Internal Financing’, ‘Self Investment’, ‘Self Financing’, ‘Ploughing back of

Profits’, etc. The retained earnings, in the long run, at the option of the management, can

be converted into the permanent capital of the firm. This process is known as

‘Capitalisation of profits’ or ‘Issuing of Bonus Shares’.

Process of Bonus Issue:

Issue of bonus shares is a conversion of reserves into share capital. The bonus shares are

the shares which are issued as bonus to the members. Prosperous companies which have

made good profits and which are prudent in their dividend policies build up reserves in

the years of profit generally to strengthen the financial position of the company and also

to meet the future needs of the company.

Bonus shares may be issued at par or at a premium. Before the issue of bonus shares the

existing shares must be fully paid. When bonus shares are issued, the company’s

Balance-Sheet must show how much of the share capital consists of bonus shares.

Share Capital

Bonus

Reserves

Process of Bonus Issue – Issue of fully paid-up Bonus shares

Share Capital

Process of Bonus Issue – Issue of partly paid-up Bonus

Call

Bonus

Reserves



Sources of Bonus Issue:

(1) In case of Fully paid-up Equity shares bonus shares can be issued from the

following:

1) Profit and Loss Account

2) General Reserve

3) Capital Reserve

4) Investment Allowance Reserve

5) Development Rebate Reserve

6) Sinking Fund for Redemption of Debentures (after redemption)

7) Capital Redemption Reserve

8) Securities Premium

(2) In case of Partly paid-up Equity shares bonus shares can be issued from the

following:

1) Profit and Loss Account

2) General Reserve

3) Capital Reserve

4) Investment Allowances Reserve

5) Development Rebate Reserve

6) Sinking Fund for Redemption of Debentures (after redemption)

Reasons (Objectives) for Issuing Bonus Shares/Stock Dividend

Issue of bonus shares does not affect the liquidity position of the company. The company

issues bonus shares to serve the following ends:

1. To enhance the prosperity of the company by conserving the cash inflows.

2. To increase capitalization, lower rate of dividend can be followed by issue of

bonus shares by a company. Increase in equity shares through bonus issue reducesrate of dividend. Usually high rate of dividend may attract adverse notice of the

general public or authorities towards profiteering.

3. To transfer the formal ownership of surplus and reserves to equity holders by

issuing bonus shares.

4. Financing the growth program of the company by expansion and diversification.



5. With broad based equity structure, a company can better bargain the debt to

balance its capital structure and increase earnings an equity shares through

financial leverage.

6. The bonus issue tends to bring the market price per share (MPS) within a more

popular range.

7. It increases the number of outstanding shares. This promotes more active trading.

8. The company can lower the rate of dividend by increasing the number of shares

through bonus issue.

9. After the bonus issue it is a true presentation of earning capacity of the firm.

10. Tax advantage since bonus issue does not attract any tax payments whereas

dividends are taxed at normal income rates.



Submitted To:

Prof. Tushar Padwal

Submitted By:

Sonali Patil

Sonam Patil

INSTITUTE OF MANAGEMENT AND COMPUTER

STUDIES



The board of Tata Steel has recommended an issue of bonus shares in the ratio of 1:2

This is subject to the approval of the shareholders at the annual general meeting of the

company on July 22.

Tata Steel had last offered bonus shares in 1987-1988 in the ratio of 2:5. According to a

senior company official, steel industry had faced tough times in the recent past. But in the

last two years, the industry as well as Tata Steel had benefited from the upturn in steelprices. Improved profitability resulting in better cash flows prompted the company to

offer a bonus share issue.

Tata Consultancy Services Ltd on Friday said its shareholders have approved the issue of

bonus shares worth up to Rs 48.93 crore to be paid in the ratio of 1:1.

Documents

BONUS SHARES 1