Bonus Issue

A bonus issueis an issue of bonus shares to the present shareholders of the company. The amount of bonus shares received by the shareholders is in direct proportion to their existing shareholding in the company.

For example, a one-for-five bonus will enable a shareholder to receive one bonus share for every five ordinary shares presently he/she is holding.

The issue of bonus shares is effected through the capitalisation of the reserve funds or retained earning of the company.

A company may decide to have bonus issues when there are sizeable accumulations in retained earnings or when a revaluation of assets creates a sizeable increase in the company's reserve funds. Hence, by issuing the bonus, the company capitalises retained earnings or reserves into shareholders' capital.

Although the issueance of bonus increases the paid up capital of the company, it does not represent an increase in shareholders' funds as it is only a transfer of funds from reserves to the share capital account.

This type of issues are frequently used as a mean of attracting investors to buy the shares of a company.

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