Bonus Issue

CAPITALISATION of accumulated profits, by issue of fully paid Equity Shares to existing and potential shareholders in the ratio of shares held by them

BONUS ISSUE

MEANING

Bonus Issue is a process in which the Accumulated profits and Reserves of a company are converted into Share Capital.

There are two types of Bonus Issues.

(A) Bonus By Way of Conversion Of Partly Paid-Up Shares Into Fully Paid-Up:

In this case

the UNPAID amount of shares is given as Bonus to

Equity Shareholders in such a way that Their partly paid up Equity Shares With the help of such Bonus are Converted into Fully Paid Up Equity Shares.

(B) Bonus By Way Of Issue Of Fully Paid Up Equity Shares:

In this case

Only fully paid up equity shareAre issued as bonus,At free of cost,To the existing equity shareholders.In proportion to their present share holding.

These bonus shares can be issued by a company

If it is authorized by its articles andThe equity shares already issued have become fully paid up, before the issue of bonus shares.

Bonus Issue does not change the value of the company because

No assets are released by way of bonus to its shareholders.

The following reserves are used for bonus issue, in the FOLLOWING ORDER.

1)Capital Redemption Reserve (Not available for bonus by way of conversion)

2)Securities Premium (Received in cash)

3)Capital Reserve (Received in cash)

4)General Reserve

5)Profit & Loss Appropriation A/C

Ques. Why companies issue free of cost bonus shares? What benefit they want to derive?

Ans. The credit worthiness of a company does not increase by huge accumulated profits (because they can be used to pay dividend), it is increased by having huge capital (because Reduction of Share capital is not allowed) that's why the accumulated profits are converted in to capital by way of bonus issue.

NOTE: These fully paid up bonus shares are not only issued to existing shareholders but the holders of Convertible Debentures are also entitled for such bonus shares.

Example

A Ltd issued 5,000 debentures of Rs 10 each fully convertible into 5,000 equity shares of Rs 10 each, after 5 years. The company issued bonus shares in the ratio of 1:5 , therefore the company have to make provision to issue 1000 shares of Rs 10 each to such debenture holders also, but will be given to them at the time of redemption of debentures.

At the time of redemption of the debentures, the company will convert their 5,000 debentures into 5000 shares and also issue 1000 shares which were declared as bonus by the company during last 5 years.