What is Bonus Share: Meaning, Types, Advantages and Disadvantages

Bonus shares have been a source of attraction for many investors, who feel drawn towards a company that shares their rewards during times of earning large profits. There have been instances where the mere declaration of the possibility of issuing bonus shares, has resulted in major surges in the share price of the issuing company on stock exchanges. Investors and existing shareholders should be aware of the intricacies of bonus shares and the implications that they may have on the company and well as their stake.

What is Bonus Share?

A company gives bonus shares in the form of additional shares without charging any cost or fee. A company can only give bonus shares to its existing shareholders. They are usually given at occasions when the company earns large amounts of profits but do not have the financial capacity to pay dividends to their shareholders. The proportion in which a company issues bonus shares corresponds to the proportion of shares that a person may hold in said company.

Types of Bonus Shares:

There are essentially two types of bonus shares that may be issued. These are:

1. Fully Paid-up Bonus Shares: These types of bonus shares are ones that do not require the payment of any additional form of payment from the shareholders. They are directly issued in a manner proportional to an individual's shareholding in a particular company. These shares may be issued using any of the following different accounts: Securities Premium Account, Capital reserves account, Profit and loss account, or Capital redemption reserves account.

2. Partly Paid-Up Bonus Shares: These are the bonus shares that are issued when a partly paid-up share is converted to a fully paid-up share without paying the remaining call amount. To make it simpler, partly paid-up shares are the ones where shareholders have not paid the full issue price. During the issuance of bonus shares, these partly paid-up shares are converted to fully paid ones without taking any additional amount from the shareholder. The remaining call amount that the company bears is what represents the bonus paid to the shareholder. 

Bonus Share Advantages:

When it comes to the issuance of bonus shares, there are multiple ways in which they benefit both the issuing company and the shareholders receiving them. Here are some of the advantages of bonus shares:

• Free from Taxes: Bonus shares are tax-free from investors' point of view. As per regulations, they do not need to pay any additional tax during the issuance of bonus shares.


• Long-term investment: Bonus shares create a multiplying value when it comes to long-term shareholders. Their hold over the issuing company’s shares strengthens without paying any additional amount for the new shares allotted to them.


• Builds Loyalty: The issuance of bonus shares is a great way to show appreciation for long-term investors and shareholders. They feel seen and trusted, which imbibes a sense of brand loyalty among the shareholders.


• Free of Additional Costs: Since an issuing company is restricted from charging any additional fee or price for bonus shares, the shareholders are entitled to the shares as well as the benefits attached to them without any additional payment.


• Increases the company's brand value: When a company issues bonus shares, it attracts more and more investors towards it, who are impressed by their gestures. Since the issuance of bonus shares is a representation of the massive profits earned by a company within a certain time period, the brand value of the company multiplies in front of its existing shareholders, potential shareholders, and all stakeholders in general.

Bonus Share Disadvantages: 

While there are very few disadvantages that are associated with bonus shares, there are some important things that investors and companies should keep in mind:

• A Costly Affair: As bonus shares are issued at times when companies run into huge profits, issuing them might actually prove to be more expensive in the long run for the companies. This is because, in the case of promising companies, share value multiplies manifold over time. Therefore, bonus shares can prove to be a future cost to companies.


• Reduces income per share: With the issuance of bonus shares, the amount of money earned from each share usually reduces as more and more shares are created. This can cause a decreased income per share for shareholders, which may prove to be a concern.


• No money inflow: As it has been made abundantly clear, shareholders do not pay for bonus shares. Therefore, companies give out bonus shares without receiving any money in return and do not receive any direct monetary benefits.