No cash is received against the issue. To the company: Conservation of Cash: In issuing bonus shares, cash outflow is not at all involved. Bonus shares are among popular corporate actions along with dividends. Consent of the Controller of Capital Issues must be obtained. 16. In such cases, the company may issue the shares for this amount to its existing shareholders. Advantages of Bonus Shares – Bonus shares increase the liquidity of the shares which makes it easier for the shareholders to sell and buy. Content Guidelines 2. For example, an employee earning $50,000 who receives a 10-percent bonus, might prefer to receive a 10-percent increase that raises her salary to $55,000. Issuing bonus shares does not involve cash flow. The Balance Sheet of India Ltd. as on 31st December is given below: At the annual general meeting it was resolved: (2) To issue one bonus share for every four shares held as on date of last Balance Sheet. Revised Directives of Central Government for the Issue of Bonus Shares. Terms of Service 7. Advantages of bonus shares: Bonus shares are issued by companies instead of paying a cash dividend. Advantages of Bonus Shares. Guidelines 4. A shareholder having 1000 shares would therefore receive 1500 bonus shares (1000 x 3 ÷ 2). Bonus Issue: A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. Contingent liabilities which may have a bearing on net profits shall be turned into consideration for the calculation of minimum residual reserve of 40%. There are two ways of such capitalisation: Illustration 1 (Bonus in the form of fully paid shares at par): A Company has a share capital of Rs 7, 50,000 in Equity Shares of Rs 10 each. (b) If the rate of profit is not increased, the rate of dividend may be decreased. (4) Good Image increases the value in market: Bonus… 4. It has a signaling effect and gives a positive sign to the market that company believes in its long-term growth story. The company can retain earnings as well as satisfy the desire of the shareholders to receive dividend. (b) A distribution of the accumulated profits to the members without any release of the company’s asset. 9. 12. Advantages Of The Issues Of Bonus Shares Finance Essay The term bonus issue also called as stock dividend means an extra dividend paid to shareholders in a company from additional profits. Free reserves created out of real profits and share premium collected in cash may be utilised for the purpose of issuing bonus shares. Applications for issue of bonus shares should be made within one month of the bonus announcement by the board of directors of the company. 3. Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Rights Issues: Reasons and Advantages | Shares, Bonus Shares: Meaning and Advantages | Company, Equity Shares: Advantages and Disadvantages | Company, Risk and Uncertainty Analysis | Capital Budgeting. Free of Cost Issuing bonus shares improves the perception of company’s size by increasing the issued share capital of the company. 11. The rate of dividend will come down to a normal level on account of distribution over an increased number of shares and thereby avoiding resentment either from the workers for increased wages or from the customers for reduced price. Advantages of Payment of Stock Dividend (Bonus Shares) Payment of stock dividend helps secure the following objectives. If the bonus is applied in extinguishing liability in respect of uncalled capital, the share will become fully paid up without involving the shareholders to pay further cash. Ascertain the maximum permissible amounts of bonus issue after applying ‘Capitalized value of earning test’ from the following data: The bonus issue out of free reserve at any one time shall not exceed the amount of equity share capital (paid-up) of the company. As the company cannot receive cash from the shareholders for the purpose of issuing bonus shares, a sum equal to the total value of bonus issue is to be adjusted against profit/reserve and transferred to Equity Share Capital Account. 5. The company can retain earnings as well as satisfy the desire of the shareholders to receive dividend. 10. Plagiarism Prevention 5. Advantages: From the Investor’s Point of View. 1. Advantages of Issuing Bonus Shares: A. Image Guidelines 4. (3) To give existing shareholders the option to purchase one share of Rs 10 each at Rs 14 for every four shares held prior to the issue of bonus shares. Bonus Shares are issued by a company when it wants to pay dividend by issuing shares. 4. Thus, the maximum permissible amount of bonus issue, after considering the data contained in the above illustration, will be the least of the following: Since, Rs. Prohibited Content 3. Advantages And Disadvantages Of Bonus Shares. Copyright 9. Advantages of issue of bonus shares to the company 1. Issue of bonus share has advantages in increasing the company’s profits into share market. If not, a copy of the resolution passed at the general body meeting in order to make the proper change of the Articles of Association should be produced. The residual reserves after the proposed capitalisation should be at least 40% of the increased paid-up capital. Report a Violation 10. 18. One of the major benefits of a cash bonus, as opposed to a stock bonus, is the avoidance of stock market risk that you incur when being compensated with company stock. Advantages of the Issue of Bonus Shares 3. Shares issued free of cost to the existing shareholders by way of capitalisation of profits and reserves are called Bonus Shares. Development rebate reserve is considered as free reserve for the purpose of calculation of residual reserves test and is also allowed to be capitalised. No bonus issue will be permitted if there is sufficient reason to believe that the company has defaulted in respect of the payment of statutory dues of the employees such as contribution of provident fund, gratuity, bonus etc. The procedures to be followed for the issue of Bonus Shares are as follows: 1. 3. Show the journal entries to give effect to the resolution, and also show how they would affect the Balance Sheet of the Company. 2. Image Guidelines 4. 7. Advantages of bonus shares are as follows: Increases Company’s Image. Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Bonus Shares: Meaning, Advantages and Disadvantages, Equity Shares: Advantages and Disadvantages | Company, Listing of Securities: Meaning and Advantages | Company, Accounting Procedure for Issue of Shares at Discount. You are required to give journal entries in the books to record the new issue of bonus shares. Copyright 9. The directors now propose to utilize the necessary amount from the general reserve for the purpose of declaring a bonus of Rs 2, 50,000 as fully paid bonus shares. 8. If shares are partially paid, it will make the shareholders liable to pay the uncalled amount. The Articles of the Company permit such a course and necessary sanction has been obtained. Bonus Shares implies an extra dividend to the shareholders of a company. It is equivalent to cash dividend because the shareholders can have money by selling the shares in the market. 7. For example, a 3 for 2 bonus issue would entitle each shareholder 3 shares for every 2 shares already held by them before the issue. As a result of such an issue, the shareholders receive few additional fully paid shares which have been paid for out of the accumulated profits and reserves of the company and the company’s issued capital increases, whereas the company’s assets remain the same. 5. 70 lakhs is the smallest one, maximum amount of bonus issue can be issued to that extent only. 30% of the average profits before tax of the company for previous three years should yield a rate of dividend on the expanded capital base of the company at 10%. So if the bonus issue is 1:1 which means they are issuing one additional share for each existing share, the market price of the share will roughly halve. Further application for issue of bonus shares may be made only after 36 months from the date of an earlier bonus issue. For this purpose, general reserve should be utilised to the minimum extent. Inspite of many advantages, the issue of bonus shares suffers from the following disadvantages: (1) The issue of bonus shares leads to a drastic fall in the future rate of dividend as it is only the capital that increases and not the actual resources of the company. 13. (3) Increase in future Income: Shareholders will get dividend on more shares than earlier in future. Disadvantages 5. Advantages of Bonus shares For the company. The shareholders are provided with an opportunity to invest their income in a prosperous company which they are not likely to get in the market except at a high premium. All applications for bonus issue should be signed by a person not below the rank of director or secretary along with a certificate which will indicate that the infor­mation furnished is true and correct and necessary data required in the application form and guidelines, have been duly complied with. Illustration 2 (Bonus in the form of fully paid shares at premium): A Company has a share capital of Rs 7, 00,000 in Equity Shares of Rs 10 each which are quoted in the market at Rs 20. Advantages of Issue of Bonus Shares. When the company does not find sufficient amount to pay cash dividend, it may pay stock dividend. 17. For employees who are looking to increase their compensation, some might prefer that a year-end bonus comes in the form of a wage or salary increase so that their earnings are compounded. Bonus shares are allotted by capitalizing the reserves and surplus. 30% of the average profits (before tax but after providing preference divi­dend) for the previous 3 years should at least yield a dividend of 10% on the expanded equity capital. Revised Directives of Central Government. The following particulars appear in the Balance Sheet of Bharat Ltd. as on 31st December: The company passed the following resolutions: 1. (3) To give existing shareholders the option to purchase one share of Rs 10 each at Rs 14 for every four shares held prior to the issue of bonus shares. Content Filtration 6. 2. Report a Violation 10. (A) For Shareholders: (1) Immediately Realizable: Bonus shares can be sold in the market immediately after a shareholder gets it. Such bonus shares are to be offered to the existing shareholders in proportion to the shareholdings and dividend rights. At any one time, total amount of bonus issue out of free reserves shall not exceed the total amount of paid-up equity capital. Between two successive announcements of bonus issues by a company should be a time lag of at least 36 months. On the other hand, their shares become fully paid up. Account Disable 11. (a) If the rate of dividend fluctuates, i.e., cannot be maintained, the market value of shares may go down. Illustration 3 (To make partly paid shares as fully paid up): A Limited Company with a subscribed capital of Rs 5,00,000 in shares of Rs 10 each had called up Rs 8 per share: As the Company built up a big reserve, it was resolved that a bonus of Rs 1,00,000 would be declared but of the reserve to be applied in making the shares fully paid. 10. Disclaimer 8. 16. These shares are known as ‘Bonus Shares’. The company now declares a bonus of Rs 6, 00,000 out of its reserve and this bonus is to be paid by issue of fully paid Equity Shares of Rs 10 each at a premium of Rs 5 per share. Terms of Service 7. (5) More Capital Availability: The earnings do not usually increase with the issue of bonus shares. (b) By issuing bonus shares shareholders are to be satisfied particularly when the company does not prefer to pay dividend in cash for the purpose of either its extension or its working capital or any other specific purposes. For the purpose of capitalisation of profits or reserve fully paid shares may be issued free of cost to the shareholders in proportion to their existing holdings or partly paid shares held by them may be made fully paid without any payment being received from them. (c) Sometimes a company is bound to reduce its reserve for the interest of its own. The Balance Sheet of Cable Ltd. is given below as on 31st December: The Board of Directors passes a resolution to capitalize a part of existing reserves and profits by issuing Bonus Shares. The Company’s General Reserve amounts to Rs 5, 00,000. Ignore taxes. (c) If partly paid shares are converted into fully paid by issuing bonus, the shareholders need not pay a further sum for the purpose. It is beneficial for the long-term shareholders of the company who want to increase their investment. 11. According to the provisions of the Companies Act, 1956, a bonus issue can be made when the following conditions are satisfied: i. Bonus issue enables a company to make use of its reserves on a permanent basis and increase the creditworthiness of the company. Such shares can be issued with the permission of the Controller of Capital Issues. Reserves created by revaluation of fixed assets are not permitted to be capitalised. Development Rebate Reserve or Investment Allowance Reserve may be con­sidered as free reserve and hence, may be capitalized. 13. Conserving cash. Cash Bonus is paid up by the company when it has large accumulated profits as well as cash to pay dividend. Issue of bonus shares results in the conversion of the company's profits into share capital. e.g. That further 1,000 fully paid Equity Bonus Shares of Rs 10 each be issued to the existing shareholders. Companies which can not pay a dividend in the form of cash because of liquid funds crisis in spite of earning a good profit as they want to retain some good amount of profit in their reserves issues additional shares to its existing shareholders which are known as bonus shares. (c) It encourages speculation which is not desirable. The advantages of issuing bonus shares to the shareholders and creditors are as follows:- 1. Reserve created by the revaluation of fixed assets is not permitted to be utilised for the purpose. (4) More realistic Balance Sheet: Balance Sheet of the company will reveal more realistic picture after the issue of bonus shares. Disclaimer 8. Content Filtration 6. The Bonus issue is permitted to be made out of free reserves built out of the genuine profits or share premium collected in cash only. It is an inexpensive way to raise capital for expansion. If the application is made both for the purpose of issuing bonus shares and right shares at the same time, permission should be given first f’- bonus issue and later for right issue. It may so happen that the amount of earning profit exceeds the amount of total paid up capital of the company which, in other words, encourages the competitors and creates unhealthy relationship between workers and the company. Issuing bonus shares mean capitalisation of profits and capitalisation of profits always increases the credit worthiness of the company to borrow funds. Conservation of Cash: Issue of bonus shares does not involve cash outflow.

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