Define: Bonus Share

A bonus share, also known as a scrip dividend or capitalization issue, is a distribution of additional shares to existing shareholders of a company without any additional cost. It is usually done by converting the company’s reserves or retained earnings into new shares.

Regular shares are typically issued through a public offering or private placement, where investors purchase shares at a specific price. On the other hand, bonus shares are issued to existing shareholders as a reward or incentive, without any monetary consideration.

In most jurisdictions, bonus shares are not subject to immediate taxation as they are considered a capitalization of the company’s retained earnings. However, when the bonus shares are eventually sold, capital gains tax may apply.

Generally, a company cannot issue bonus shares if it has accumulated losses. Bonus shares are typically issued from the company’s reserves or retained earnings, which should be positive. However, specific regulations may vary depending on the jurisdiction.

Bonus shares are accounted for by transferring an appropriate amount from the company’s retained earnings to the share capital or share premium account. This reflects the increase in the number of shares outstanding without affecting the company’s net assets.

Yes, bonus shares can be issued by both public and private companies, subject to the applicable laws and regulations governing the issuance of shares in the respective jurisdiction.

No, bonus shares do not dilute the ownership of existing shareholders. Although the number of shares outstanding increases, the proportionate ownership of each shareholder remains the same. For example, if a shareholder owns 10% of the company before the bonus issue, they will still own 10% after the bonus issue.

Yes, bonus shares can be issued to preference shareholders if the company’s articles of association allow for such issuance. However, preference shareholders may have specific rights and restrictions outlined in their shareholding agreements that need to be considered.

In general, it is uncommon for a company in financial distress to issue bonus shares. The issuance of bonus shares is usually seen as a way to reward existing shareholders and enhance investor confidence, which may not be appropriate in a financially troubled situation.

No, bonus shares cannot be converted into cash dividends. Bonus shares are issued as additional shares of the company, and their purpose is to reward shareholders by increasing their ownership stake. Cash dividends, on the other hand, involve the distribution of profits in the form of cash payments to shareholders.