What is Bonus Issue of Shares?
What is Rights Offering?
Bonus Shares (or Bonus issue or shares) refers to free shares issued to the existing shareholders of the company, in a proportion to the number of shares held by the shareholder. For example, if a company declares 1:2 bonus issue, then it means all the existing shareholders will get one additional share for every 2 shares they hold.
Bonus Shares are distributed as an alternative to paying cash dividends.
Shareholders are allowed to sell these bonus shares to meet their income needs.
The bonus issue of shares only increases the total number of outstanding shares, but it does not change the company's net worth. Though the bonus issue increases the total number of shares issued by the company, the ratio of shares owned by the shareholder remains same.
Bonus shares do not inject fresh working capital into the company, as they are distributed among the shareholders without any consideration.
The above statements may sound similar to the stock split, but they are different in many ways.
Issuing bonus shares is an option for the companies to increase short-term liquidity.
This can be thought of as an indirect solution for cash limitations since it prevents the outflow of money in the form of dividends while increase short-term liquidity of stocks.
To learn more about bonus issue, check our guide on what is bonus issue of shares.