Shares - Bonus Issue
A bonus issue is an allotment of shares to existing shareholders in accordance with their dividend rights and are issued pro rata with the shares they already hold. The shares are paid for in full from the undistributed reserves of the company, so instead of paying out the profit as dividends, the money is used to pay for additional shares given to each shareholder.
The issue of 'Bonus Shares' is not to be confused with a 'rights issue' which, although similar is different in that issues are in accordance with shareholders current shareholdings and the shares are paid for in full by the shareholder (usually in full in cash on acceptance of the shares offered).
The reasons for issuing bonus shares are various but can include:
- Making the balance sheet look stronger by increasing the share capital;
- Making individual share values more realistic;
- Increasing the number of shares so that some may be given away or sold;
- Increasing the number of shares held by the existing shareholders so that the company may issue other shares to outside investors.
One effect of a bonus issue is that it can reduce the amount of money available for paying dividends, so the term bonus is not always appropriate and that is why the term 'capitalisation of reserves' is sometimes used.
A 'Bonus Issue' may be non-renounceable - which means that only the allottee may accept the offered shares or renounceable - which means that shares can be accepted in favour of third parties.
- Professional Advice is necessary to determine what reserves may be used by the company.
- As there is no statutory authority under which the company may issue bonus shares it is important the articles of association of the company gives it power to do so. In the event that there is no existing power within the articles it is recommended that the model 2006 articles be adopted in substitution for and to the exclusion of the Company's existing Articles of Association.