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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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