Bonus share


Bonus shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.
An issue of bonus shares is referred to as a '''bonus share issue.'''

Valuation and Ratios

A bonus issue is usually based upon the number of shares that shareholders already own. The process follows the mathematical logic of a capital increase from company funds.
Whenever a company announces a bonus issue, it also announces a book closure date which is a date on which the company will ideally temporarily close fresh transfers of stock. This ensures that the bonus shares are allocated to the correct beneficial owners recorded in the register of members at the record date.
Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus shares are distributed in a fixed ratio to the shareholders.
Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. Under English law, for example, Section 610 of the Companies Act 2006 permits the use of the share premium account to pay up fully paid bonus shares.
Because a bonus issue does not represent an economic event, no wealth changes hands at the point of issuance. The current shareholders simply receive new shares, for free, and in proportion to their previous share in the company. Therefore, a bonus share issue is very similar to a stock split. The only practical difference is that a bonus issue creates a change in the structure of the company's shareholders' equity by moving funds from retained earnings or reserves to share capital. Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's authorized share capital, the distribution of bonus shares only changes its issued share capital.

Tax and Legal Implications

A bonus share issue is most commonly not taxed as a dividend at the time of receipt, even if it is charged to retained earnings. From a legal standpoint, this is because a bonus issue is characterized as a "re-shuffling" of the company's capital accounts rather than a distribution of new wealth to the shareholder.
However, there are significant capital gains implications upon the subsequent sale of these shares:
  • Cost Basis : In many jurisdictions, the cost base of the bonus shares is considered to be zero. Effectively, the total original investment is spread across a larger number of shares, reducing the average cost per share.
  • Holding Period: For tax purposes, the acquisition date of the bonus shares is typically deemed to be the same as the acquisition date of the original shares.
  • Taxable Exceptions: If a shareholder has the option to receive cash instead of bonus shares, the issue may be treated as a taxable dividend equal to the market value of the shares.