BONUS ISSUE (Syllabus: GS Paper 3 – Economy)

Context: Reliance Industries Chairman recently announced a bonus issue for the company’s shareholders in a 1:1 criterion.

Bonus Issue

• About: It is also called a scrip issue or capitalization issue, occurs when a company offers free additional shares to its existing shareholders.
• Share Allocation: The company determines the number of bonus shares to be given based on the number of shares an investor holds over a specified period.
• Objective: The bonus issue aims to attract more investment and reward existing shareholders, improving the company's market image.
• Increase in Share Capital: A bonus issue increases the company’s share capital but does not affect its market capitalization.

o Market capitalization is calculated by multiplying the current stock price by the total number of outstanding shares. It remains unchanged after a bonus issue.

Bonus Shares

• About: These are additional shares given to existing shareholders without any additional cost. Companies issue bonus shares as a way to reward shareholders and to capitalise on their accumulated reserves. 
• Example: if a company announces a bonus issue in the ratio of 1:1, it means that a shareholder will receive one additional share for every share they already own.
• Mechanism: When a company announces a bonus issue, the board of directors decides the ratio of the bonus shares and the record date, which is the date on which you must be a shareholder to qualify for the bonus shares.
• Tax: For shareholders, receiving bonus shares is not a taxable event. However, when these shares are sold, any gains realised will be subject to capital gains tax.