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Corporate Tax Planning
Notes 5. Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued
since the shareholders become liable to pay the uncalled amount on those shares.
Notes It is important to note here that Issue of bonus shares does not entail release of
company’s assets. When bonus shares are issued or credited as fully paid up out of
capitalised accumulated profits, there is distribution of capitalised accumulated profi ts
but such distribution does not entail release of assets of the company.
9.4.2 Advantages of Bonus Shares
One of the major reasons why companies declare bonus issues is that a higher number of shares
improves float and liquidity and thereby traded volumes of the stock. A lower price also makes
the stock seem more affordable to small retail investors, who might otherwise give it a miss at
high price levels. Another aspect of a bonus issue is that it reflects the confidence of the company
in its ability to service a larger equity base. Thus, bonus issues are said to be a good signalling
mechanism on the company’s capacity to deliver future benefits to shareholders in terms of
increased dividend.
The issue of bonus shares has once again come into limelight as several companies like Infosys,
Wipro and Sun Pharma etc, have recently declared bonus shares for their shareholders. The
announcement of a bonus certainly excites shareholders, because they would be receiving shares
from the company without having to pay any consideration to the company.
Example: A company has an authorised share capital of ` 1, 00,000. It has issued 10,000
shares with a face value of ` 10 each. Thus, its issued share capital is also ` 1, 00,000. It has
an accumulated reserve of ` 10, 00,000. It decides to issue bonus shares in the ratio of 1:1 or
“1 for 1” – that is, 1 bonus shares for each share held. In this case, it transfers ` 1, 00,000 from
its reserves to its authorised share capital. Thus, its reserves come down to ` 9,00,000, and its
authorised share capital increases to ` 2,00,000. Using this new share capital of ` 1,00,000, the
company issues 10,000 new shares, each having a face value of ` 10, and gives a new share – the
bonus share – for each share held. Its issued share capital also goes up to ` 2, 00,000.
Advantages of issue of bonus shares to the company:
1. Conservation of Cash: Issue of bonus shares does not involve cash outflow. The company
can retain earnings as well as satisfy the desire of the shareholders to receive dividend.
2. Keeps the EPS at a reasonable level: A company having high EPS may face problems both
from employees and consumers.
(a) Employees may feel that they are underpaid.
(b) Consumers may feel that they are being charged too high for the company’s
products.
(c) Issue of bonus shares increases the number of shares and reduces the earning per
share.
3. Increases the marketability of company’s shares: Issue of bonus shares reduces the market
price per share. The price of the share may come within the reach of ordinary investors.
This increases the marketability of shares.
4. Enhances prestige of the company: By issuing bonus shares, the company increases its
credit standing and its borrowing capacity. It refl ects financial strength of the company.
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