INTRODUCTION: The Oxford English Dictionary gives the meaning of bonus shares as; “an extra dividend paid to share holders in a joint stock company from surplus profits”. In legal context, a bonus share is not a dividend. The guidelines issued by the ministry of Finance prohibit declaration of bonus shares in lieu of dividends. Bonus shares may be issued in addition to dividends. In bonus issue, shares are issued to existing shareholders as a gift i.e without charging any payment. STOCK SPLIT-UPS: Stock split-ups involves reduction of the par value of the stock which leads to merely increase in the number of outstanding shares. There is no change in the total stated value of the stock or in the surplus. It has no effect on the shareholders equity. Objectives of Stock split-ups: (a) To reduce the unit market price of the shares by increasi ng the number of outstanding Shares. (b) To conceal the distribution of large profits by r educing the rate per share. (c) To provide a broader and stable mar ket for the company’s shares . (d) To prepare for corporate mergers. (e) To please the shareholder, since spl it-ups are taken as an i ndicator of the financial success of a corporation.
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(1) In case of Fully paid-up Equity shares bonus shares can be issued from the
following:
1) Profit and Loss Account
2) General Reserve
3) Capital Reserve
4) Investment Allowance Reserve
5) Development Rebate Reserve
6) Sinking Fund for Redemption of Debentures (after redemption)
7) Capital Redemption Reserve
8) Securities Premium
(2) In case of Partly paid-up Equity shares bonus shares can be issued from the
following:
1) Profit and Loss Account
2) General Reserve
3) Capital Reserve
4) Investment Allowances Reserve
5) Development Rebate Reserve
6) Sinking Fund for Redemption of Debentures (after redemption)
Reasons (Objectives) for Issuing Bonus Shares/Stock Dividend
Issue of bonus shares does not affect the liquidity position of the company. The company
issues bonus shares to serve the following ends:
1. To enhance the prosperity of the company by conserving the cash inflows.
2. To increase capitalization, lower rate of dividend can be followed by issue of
bonus shares by a company. Increase in equity shares through bonus issue reducesrate of dividend. Usually high rate of dividend may attract adverse notice of the
general public or authorities towards profiteering.
3. To transfer the formal ownership of surplus and reserves to equity holders by
issuing bonus shares.
4. Financing the growth program of the company by expansion and diversification.
The board of Tata Steel has recommended an issue of bonus shares in the ratio of 1:2
This is subject to the approval of the shareholders at the annual general meeting of the
company on July 22.
Tata Steel had last offered bonus shares in 1987-1988 in the ratio of 2:5. According to a
senior company official, steel industry had faced tough times in the recent past. But in the
last two years, the industry as well as Tata Steel had benefited from the upturn in steelprices. Improved profitability resulting in better cash flows prompted the company to
offer a bonus share issue.
Tata Consultancy Services Ltd on Friday said its shareholders have approved the issue of
bonus shares worth up to Rs 48.93 crore to be paid in the ratio of 1:1.