Question

Explain the following term/concept:

Bonus shares

Write briefly on Bonus Shares.

Answer 1

Bonus shares are fully paid shares issued free of cost to the existing equity shareholders in proportion to their shareholdings. Usually, financially sound companies issue Bonus Shares out of their accumulated distributable profits or reserves. Hence, as the profits or reserves are capitalised, it is also called ‘Capitalisation of Profits or Reserves’. A company cannot issue Bonus shares out of reserves created by the Revaluation of Assets. It also cannot issue Bonus Shares instead of paying dividends. Once the announcement for Bonus Shares is made by the Board of Directors, it cannot be then withdrawn.