What are bonus shares? When are they issued?

Bonus share are issued by well managed profitable companies from the free reserves of the company to the existing shareholders. The bonus shares are issued in a definite ratio like 1:1, 1:2 etc. In the case of 1:1, every shareholder owning 1 share of a company would be entitled to another share free of cost. So, in the end he would be holding two shares of the company after the bonus is declared.

What is the impact an advantage of issue of bonus shares

When bonus shares are issued the share price is reduced. For example, if company A issues a bonus of 1:1 and the share price is Rs 1000, it automatically will reduce to Rs 500, after the bonus share is issued.

The advantage of issuing bonus for a company is that it makes the share more liquid. For example, in the above example, if the share price is halved many more people would be able to buy the shares, as compared to when it was Rs 1000.

Impact on key ratios

Bonus shares result in the equity capital going up, which will impact every ratio which has equity as a factor. For example, the EPS would reduce as the equity capital has gone up. Therefore, bonus shares are issued by good companies who are confident of servicing larger equity after the bonus shares are issued.

In the past companies like Reliance Industries, Infosys Technologies and more recently Sun Pharma have announced issue of bonus shares to their shareholders.

From where are bonus shares issued

Bonus shares are issued from the free reserves of the company, which have been accumulated from the profits of the company over the years. After the issue of bonus shares the capital rises and the free reserves reduce.

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