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Unit 9: Financial Management Decisions
5. It helps in financing its projects: By issuing bonus shares, the expansion and modernisation Notes
programmes of a company can be easily financed. The company need not depend on
outside agencies for fi nances.
6. Retention of managerial control: Any new issue of shares has a danger of dilution of
managerial control over the company. Since bonus shares are issued to the existing
shareholders in proportion to their current holdings, there is no threat of dilution of
managerial control over the company.
Advantages to the Shareholders
1. Tax benefi ts: When a shareholder receives dividend in cash, it adds to his total income
and is taxed at usual income tax rates. From this point of view the bonus shares increase
the wealth of shareholders. In case the shareholder requires cash he can sell his additional
shares.
2. Indication of higher future profi ts: Issue of bonus shares is generally an indication of higher
future profits. This is because a company declares a bonus issue only when its earnings are
expected to increase.
3. Increase in future dividend: The shareholder will get more dividends in the future even it
the company continues to offer existing cash dividend per share.
4. High psychological value: Issue of bonus shares is usually perceived positively by the
market. This tends to create greater demand for the company’s shares. In fact, always the
share prices rise at the declaration of bonus shares.
Example: Ashok Leyland, Titan Industries and Bhuwalka Steel Industries offered
bonus shares to investors, resulting in a rise in prices. The share prices of Ashok Leyland, Titan
Industries and Bhuwalka Steel jumped around 2 per cent, 9 per cent and 10 per cent, respectively,
from the date of announcement till the record date.
Issue of Bonus Shares and Taxation
The tax benefi t provided by issue of bonus shares holds the concern for every company whose
in the process of dividend declaration Firms opt for issue of bonus shares due to a number of
reasons as stated above however among them the one related to tax benefit also hold a signifi cant
importance. An issue of bonus shares on capitalisation of profits does not entail payment of
any tax either for the company or its shareholders. When bonus shares are sold, the cost of such
shares will be considered to be nil. If such bonus shares are held for more than 12 months and
sold on a stock exchange, the capital gains are exempt from tax (subject to payment of securities
transaction tax). If sold within the 12-month period, the capital gains are taxable at 15% (plus
surcharge). The cost price of the original shares is not adjusted pursuant to the bonus issue.
Self Assessment
Fill in the blanks:
18. A ……………… 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
19. Bonus shares can be issued by a company only if the ……………… of the company
authorises a bonus issue.
20. One of the major reasons why companies declare bonus issues is that a higher number of
shares improves ………………. and thereby traded volumes of the stock.
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