Page 218 - DCOM508_CORPORATE_TAX_PLANNING

Unit 9: Financial Management Decisions

Notes
Example: If a company announces a bonus issue of 1:1 and if you were originally holding
100 shares, you would get another 100 shares after the bonus issue.
Since such shares are issued to the equity shareholders in proportion to their holdings of equity
share capital of the company, a shareholder continues to retain his or her proportionate ownership
of the company. Issue of bonus shares does not affect the total capital structure of the company. It
is simply a capitalisation of that portion of shareholders’ equity which is represented by reserves
and surpluses. It also does not affect the total earnings of the shareholders. Issue of Bonus Shares

is more or less a financial gimmick without any real impact on the wealth of the shareholders.
Still firms issue bonus shares and shareholders look forward to issue of bonus shares.

A bonus issue or scrip issue is a stock split in which a company issues new shares without
charge in order to bring its issued capital in line with its employed capital (the increased capital

available to the company after profits). This usually happens after a company has made profi ts,
thus increasing its employed capital. Therefore, a bonus issue can be seen as an alternative to
dividends. No new funds are raised with a bonus issue.

Did u know? A stock split is a decision by the company’s board of directors to increase the
number of shares that are outstanding by issuing more shares to current shareholders.
For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional
share. So, if a company had 10 million shares outstanding before the split, it will have 20
million shares outstanding after a 2-for-1 split.
In a stock split the face value per share is reduced and the number of shares is increased
proportionately. A stock split is similar to a bonus issue from economic point of view. But
there are some differences from the accounting point of view.

Unlike a rights issue, a bonus issue does not risk diluting your investment. Although the earnings
per share of the stock will drop in proportion to the new issue, this is compensated by the fact
that you will own more shares. Therefore the value of your investment should remain the same
although the price will adjust accordingly. The whole idea behind the issue of Bonus shares is to
bring the Nominal Share Capital into line with the true excess of assets over liabilities.

9.4.1 Conditions for Issue of Bonus Shares

Bonus shares are issued by converting the reserves of the company into share capital. It is nothing
but capitalisation of the reserves of the company. There are some conditions which need to be

satisfied before issuing bonus shares:
1. Bonus shares can be issued by a company only if the Articles of Association of the company
authorises a bonus issue. Where there is no provision in this regard in the articles, they must
be amended by passing special resolution act at the general meeting of the company.
2. It must be sanctioned by shareholders in general meeting on recommendations of BOD of
company.
3. Guidelines issue by SEBI must be complied with. Care must be taken that issue of bonus
shares does not lead to total share capital in excess of the authorised share capital.
Otherwise, the authorised capital must be increased by amending the capital clause of the
Memorandum of association.

4. If the company has availed of any loan from the financial institutions, prior permission is to
be obtained from the institutions for issue of bonus shares. If the company is listed on the
stock exchange, the stock exchange must be informed of the decision of the board to issue
bonus shares immediately after the board meeting. Where the bonus shares are to be issued
to the non-resident members, prior consent of the Reserve Bank should be obtained.

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