What Are Bonus Shares? How Are They Allotted?
Bonus shares refer to shares that are provided to the current shareholders of the company who are investing in it, based on the number of shares of that company currently being held by the shareholder. These shares are given to the shareholders without any cost, and thus are free (or bonus) shares.Basically, these are a part of the earnings of the company only but are not distributed in the form of dividends. Instead, companies convert them into bonus shares and distribute them to certain shareholders. The major reason for the issuance of bonus shares is to increase the equity base of a company and also to boost retail participation.
Declaration of bonus shares increases the number of shares which results in bringing down the price of each individual share (price per share), but the total amount of capital remains largely unchanged. Reduction in the price per share in the financial market attracts new investors to invest in the company by buying shares.
Allotment of Bonus Shares
The most common way of issuing bonus shares is following the principle that the number of shares must increase with a ratio of the number of shares held by the shareholder to the number of outstanding shares, and this ratio remains constant. For example: If a shareholder holds 300 shares of a particular firm and the firm decides to give out a 3:1 bonus; that means that the shareholder is awarded 3 free shares for every single share held by him. Thus, the investor gets 900 bonus shares and this increases his total number of shares to 1200.
Companies plan to give out bonus shares beforehand and accordingly, start accumulating a reserve by saving a part of their earnings which is not distributed in the form of a dividend. Once these reserves reach a specific level, the amount is moved to the capital account and from here, the bonus shares are subsequently issued.Shareholders holding both equity shares and preference shares are entitled to bonus shares. Also, almost all companies listed on the National Stock Exchange prefer issuing bonus shares from time to time.
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