Bonus Issue

Definition:

A bonus issue is a distribution of additional shares of stock or other securities to existing shareholders as a reward or incentive. It is typically done to increase the company’s share price and attract new investors.

Types of Bonus Issues:

• Cash bonus: Payment of a cash dividend in addition to the regular dividend.
• Stock bonus: Distribution of new shares of stock to existing shareholders.
• Employee stock purchase plan (ESPP): Offer to employees to purchase company stock at a discount.
• Stock split: Division of existing shares into a larger number of shares.
• Stock dividend: Payment of dividends in the form of new shares of stock.

Reasons for Bonus Issues:

• Increase share price: Bonus issues can drive up demand for the company’s stock, leading to a higher share price.
• Attract investors: Investors are more likely to invest in a company that offers bonuses.
• Improve financial standing: Bonus issues can improve the company’s financial standing by increasing its market capitalization.
• Distribute excess cash: Companies may issue bonuses to distribute excess cash to shareholders.
• Employee retention: ESPPs can help attract and retain employees.

Impact of Bonus Issues:

• Increase in share price: Bonuses can lead to a surge in demand, resulting in a higher share price.
• Potential dilution: Issuing new shares can dilute the existing shareholders’ ownership.
• Increased shareholder volatility: Bonus issues can create fluctuations in share price, making them more volatile.
• Tax implications: Bonus issues may have tax implications for shareholders.

Examples:

• A company announces a 10% stock bonus, which means that each shareholder will receive 10% additional shares of stock.
• An ESPP allows employees to purchase company stock at a 15% discount.

Conclusion:

Bonus issues can be a strategic move by companies to increase their share price, attract investors, and improve their financial standing. However, it’s important to consider the potential dilution and volatility effects before implementing such a strategy.