When the extra portions are allotted to the bing stockholders without having any extra payment from them. it is known as issue of bonus portions. Bonus portions are allotted by capitalising the militias and excess. Issue of bonus portions consequences in the transition of the company’s net incomes into portion capital. Therefore it is termed as capitalisation of company’s net incomes. Since such portions are issued to the equity stockholders in proportion to their retentions of equity portion capital of the company.
a stockholder continues to retain his / her proportionate ownership of the company. Issue of bonus portions does non impact the entire capital construction of the company. It is merely a capitalisation of that part of shareholders’ equity which is represented by militias and excesss. It besides does non impact the entire net incomes of the stockholders.
Issue of Bonus Shares is more or less a fiscal catch without any existent impact on the wealth of the stockholders. Still houses issue bonus portions and stockholders look frontward to publish of bonus portions.Reasons for publishing Bonus Shares1. The fillip issue tends to convey the market monetary value per portion within a more sensible scope. 2. It increases the figure of outstanding portions. This promotes more active trading.
3. The nominal rate of dividend tends to worsen. This may chase away the feeling of profiteering. 4. Share capital base additions and the company may accomplish a more dramatic size in the eyes of the investment company. 5. Stockholders regard a fillip issue as a strong indicant that the chances of the company have brightened and they can reasonably look for an addition in entire dividend.
6. It improves the chances of raising extra financess.Regulation of Bonus IssuesImportant regulative commissariats regulating issue of bonus portions are: 1. The fillip issue is made out of free militias built out of the net incomes or portion premium collected in hard currency merely. 2. The residuary militias after the proposed capitalisation shall be at least 40 % of the increased paid up capital.Stock SplitsIn a stock split the face value per portion is reduced and the figure of portions is increased proportionally.
A stock split is similar to a bonus issue from economic point of position. But there are some differences from the accounting point of position.Difference between Bonus Issue and Stock Split|Bonus Issue |Stock Split | |1. The par value of portion is unchanged.
|1. The par value of portion is reduced. | |2. A portion of the militias is capitalized. |2. There is no capitalisation of militias. |Advantages of issue of bonus portions to the company1.
Conservation of Cash:Issue of bonus portions does non affect hard currency escape. The company can retain net incomes every bit good as satisfy the desire of the stockholders to have dividend. 2.
Keep the EPS at a sensible degree:A company holding high EPS may confront jobs both from employees and consumers. Employees may experience that they are underpaid.Consumers may experience that they are being charged excessively high for the company’s merchandises. Issue of bonus portions increases the figure of portions and reduces the earning per portion. 3. Increases the marketability of company’s portions:Issue of bonus portions reduces the market monetary value per portion. The monetary value of the portion may come within the range of ordinary investors. This increases the marketability of portions.
4. Enhances prestigiousness of the company:By publishing bonus portions. the company increases its recognition standing and its adoption capacity. It reflects fiscal strength of the company. 5. It helps in financing its undertakings:By publishing bonus portions.
the enlargement and modernisation programmes of a company can be easy financed. The company need non depend on outside bureaus for fundss. 6. Retention of managerial control:Any new issue of portions has a danger of dilution of managerial control over the company.
Since fillip portions are issued to the bing stockholders in proportion to their current retentions. there is no menace of dilution of managerial control over the company.Advantages to the stockholders1. Tax benefits:When a stockholder receives dividend in hard currency.
it adds to his entire income and is taxed at usual income revenue enhancement rates. From this point of position the fillip portions increase the wealth of stockholders. In instance the stockholder requires hard currency he can sell his extra portions. 2. Indication of higher future net incomes:Issue of bonus portions is by and large an indicant of higher future net incomes.
This is because a company declares a fillip issue merely when its net incomes are expected to increase. 3. Addition in future dividend:The stockholder will acquire more dividends in the hereafter even it the company continues to offer bing hard currency dividend per portion. 4. High psychological value:Issue of bonus portions is normally perceived positively by the market. This tends to make greater demand for the company’s portions. In fact. ever the portion monetary values rise at the declaration of fillip portions.
Restrictions of Bonus IssuesDisadvantages for the company:1. Issue of bonus portions leads to an addition in the capitalisation of the company. The increased capitalisation can be justified merely if there is addition in the earning capacity of the company.
2. After the issue of the fillip portions the stockholders expect the bing rate of dividend per portion to go on. It is truly a challenging undertaking for the company to retain the bing rate of dividend per portion. 3.
Issue of bonus portions prevents new investors from going the stockholders of the company ( no uncertainty they can purchase the portions in the secondary market ) . Disadvantages to the stockholders:1. Some stockholders may prefer hard currency dividend to stock dividend. such stockholders may experience defeated ( no uncertainty they can really good sell their fillip portions and acquire their money ) .