What Is a Bonus Issue?

A bonus issue (also known as scrip issue or capitalisation issue) is when a company gives an offer of free additional shares to its existing shareholders. The new shares are issued to the shareholders in proportion to their current share holdings.

Bonus shares are made out of a company’s accumulated profits or retained earnings which are profits that have accumulated over the years and not paid out in the form of dividends but have been retained in the business.

A bonus issue increases the total number of issued shares and the ratio of number of shares held by each shareholder remains constant.

Reasons for bonus issue

1. When a company wants to encourage retail participation and increase the capital base – bonus issue increases the number of shares which causes a fall in the price of the share therefore making the shares affordable to potential investors.
2. If a company has low operating cash, it can give additional shares to its shareholders instead of a dividend pay-out.
3. When the company has sufficient reserves that it does need in the future.

Example

In May 2015, Crown Paints (BERG) announced a bonus issue of two shares for every one share held. This means that if a shareholder has 10,000 shares, the new total shares held would be;

Original number of shares = 10,000

Bonus issue ratio = 2 for 1

Bonus shares = 10,000*2= 20,000

Total number of shares = 10,000 + 20,000 = 30,000