Bonus shares are shares distributed by a company to its current

shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal ow ...

as fully paid shares free of charge. *to capitalise a part of the company's

retained earnings The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...

*for conversion of its

share premium Capital surplus, also called share premium, is an account which may appear on a corporation's balance sheet, as a component of shareholders' equity, which represents the amount the corporation raises on the issue of shares in excess of their par v ...

account, or *distribution of

treasury shares A treasury stock or reacquired stock is Share capital, stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings). Share repurchase, Stock repurcha ...

. An issue of bonus shares is referred to as a bonus share issue. A bonus issue is usually based upon the number of shares that shareholders already own. (For example, the bonus issue may be "''n'' shares for each ''x'' shares held"; but with fractions of a share not permitted.) While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of

issued shares In finance and law, issued shares are the shares of a corporation which have been allocated (allotted) and are subsequently held by shareholders. The act of creating new issued shares is called ''issuance''. Allotment is simply the transfer of sha ...

increases, the ratio of number of shares held by each shareholder remains constant. In this sense, a bonus issue is similar to a

stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...

Process

Whenever a company announces a bonus issue, it also announces a book closure date which is a date on which the company will ideally temporarily close fresh transfers of stock. Depending upon the

constitutional documents In relation to juristic persons, the constitutional documents (sometimes referred to as the charter documents) are the documents which define the existence of an entity and regulate the structure and control of that entity and its members. The pr ...

of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus shares are distributed in a fixed ratio to the shareholders. Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. Because a bonus issue does not represent an economic event – no wealth changes hands. The current shareholders simply receive new shares, for free, and in proportion to their previous share in the company. Therefore, a bonus share issue is very similar to a

. The only practical difference is that a bonus issue creates a change in the structure of the company's

shareholders' equity In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...

(in accounting). Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's

authorized share capital The authorised capital of a company sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its con ...

, the distribution of bonus shares only changes its

issued share capital In finance and law, issued shares are the shares of a corporation which have been allocated (allotted) and are subsequently held by shareholders. The act of creating new issued shares is called ''issuance''. Allotment is simply the transfer of sha ...

(or even only its

outstanding shares Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...

Tax implications

A bonus share issue is most commonly not taxed as a

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

, even if it is charged to retained earnings. However, there may be capital gains or profit on sale implications on the subsequent sale of these shares. In general, the cost base of the bonus shares is usually zero, but if the bonus issue is taxable as a dividend, then the cost base is generally the taxed dividend amount, plus any calls on partly paid bonus shares. The acquisition date is the date of issue.

References

Corporate law Dividends {{law-term-stub