Introduction
Issuing bonus shares and right shares is a common practice for companies doing financially well to incentivize their shareholders. It not only creates a positive impression of the company in the market but also provides an impetus to the investors to have more stake in the company.
Many times people get confused between the two. In both the cases additional shares are issued but the primary difference between is of their nature. While bonus shares are the extra shares presented to the shareholders free of cost, the right shares are those additional shares that are provided at a discounted price.
What is a Bonus Issue?
A bonus issue of share which is also known as scrip or capitalization issue refers to providing shareholders with additional shares free of cost. It is a strategy used by companies to incentivize existing holders without distributing dividends in the form of cash.
example, if a company issues bonus shares in the ratio of 1:2 then it means that the one share is issued for every 2 shares held by an existing shareholder. To find the number of bonus shares issued to any shareholder you can use the bonus issue ratio formula i.e. Bonus Issue
Ratio = Number of bonus share/Number of existing shares.
Why do companies issue bonus shares?
1). Capital surplus reserve: Companies announcing bonus shares is a sign that they are financially strong with ample reserves, and they want to capitalize the reserve by issuing bonus shares.
2). Avoid cash bonus: Generally, companies issue bonus shares when they are not in a position to cash bonus in the form of dividends as it affects their working capital negatively.
3). Better aligned capital structure: In cases where a company's fixed asset value exceeds the share capital value it signals the underutilization of share capital. Therefore, companies issue bonus shares which increases the share capital hence improving the capital structure of the company.
Know in detail about What is the record date for bonus issue?
Benefits of bonus shares to investors
1). Investors don't have to tax the monetary benefits from bonus shares.
2). Bonus shares are also beneficial for the short-term investors who don't want to stay invested in them for the long term and expect quick returns from their investments.
3). When companies issue additional shares to benefit the shareholders instead of burning cash it signifies that companies are ready to use that cash for the future growth of the business which could exponential returns to the investors in the future instead of short-term gains.
4). Issuing additional shares to shareholders also benefits the latter if the company decides to distribute dividends later as he will get more cash for the extra shares he got after the bonus issue.
Procedure for issue of bonus shares
1) Call Board meeting: The for most step to issue bonus shares is to call a board meeting.
According to Section 173(3) of the act, the notice must be at least 7 days before the Board Meeting should be issued 7 days prior to the meeting.
2). Carry out the Board meeting successfully: The next step is to carry out the board meeting successfully for which the following steps must be ensured: It is to be made sure that the meeting has the required quorum i.e. one-third of the total board members.
Put forwards the resolution in front of the shareholders for approval in a general meeting by way of ordinary resolution..
Make sure that the resolution is passed.
Fix the ratio of the bonus issue.
Fix a date, time and venue for the general meeting and also authorize a director to send notices for the meeting.
3) The next step is to circulate the minutes of the board meeting to all the directors for comments. In case of public companies, they have to file the board resolution in the form of MGT-14 with the Registrar of Companies in 30 days.
4) Timely intimation of General Meeting: Next step is to intimate all directors, shareholders, auditors and members about the general meting to approve the bonus issue via a notice atleast 21 days prior.
5) Carry out the general meeting: Now, you must convene the general meeting and pass the ordinary resolution to allow issue of bonus shares by obtaining simple majority as per section 114(1).
6) Carry out a Board Meeting: Next you will have to carry out a board meeting for approving the allotment of bonus shares and follow set protocols for the needful.
7) File Return of Allotment in Form PAS-3: The return of allotment in Form PAS-3 needs to be filed by the company within 30 days of the allotment of securities, only if the company has share capital. The attachments are as follows:
A certified copy of the Ordinary Resolution adopted in the Extraordinary General Meeting. A copy of the Board Resolution approving the share allotment.
A certified list of allottees with their names, addresses, occupations if any, and number of securities allotted to each. This list shall be certified by the signatory of Form PAS-3.
8). Share Certificate Issue: In the last step, immediately after allotment the company must inform the depositories about when the shares will be held in demat form and if the shares are isssued in the physical form then it must be done within 2 months of the allotment.
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Disadvantages to the shareholders
1). Not every investor in more shares in the company prefers liquidity too in order to carry out other activities. Also, when these investors sell their bonus shares then their stake in the company is also reduced.
2). There is no real addition in the wealth of shareholders when bonus shares are issued as the share price of the total shares held by the holder drops in proportion to the new shares issued which keeps the market capital the same as before. The real gain is in holding the shares in the long term if the share price increases, which is not the priority of everyone.
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SEBI guidelines for issue of bonus shares
If there are Fully Convertible Debentures (FCDs) and Partial Convertible Debentures (PCD) pending for conversion, then in this case bonus issue cannot be made by the company unless the holders of such FCDs and PCDs are given the benefit equivalent to that of bonus issue.
Companies can issue bonus shares only out of the reserves created out of either profits or cash collected from share premiums. In the case, where shares are issued for consideration besides cash then in this case premium earned on these issues could not be used to issue bonus shares.
A publicly listed company cannot issue bonus shares out of revaluation reserves.
Companies cannot issue bonus shares as a replacement for dividends.
If a company still has some partly paid-up shares, it cannot issue bonus shares unless those shares are fully paid up.
Final Thoughts
Companies reward existing shareholders with bonus shares. The shares themselves do not add to an investor's wealth, but they enhance the survival and competitiveness of the company in the long run. Bonus shares generally give investors a positive view about the company's performance and its growth potential. This has a tendency to push up stock prices and general market perception.
Bonus shares issued by the companies are the strategic approach through which companies improve their investor relationships and distribute profits so that investors show loyalty and trust
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