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A bonus issue is an additional offer of shares that is extended to current shareholders. Sometimes known as a script issue or a capitalization issue, this type of additional issue of stock is sometimes employed as a strategy to avoid increasing the total dividend payout to shareholders. Typically, the number of shares offered is related to the number of shares already in the possession of each shareholder.
When a company experiences a significant amount of retained earnings, the creation of a bonus issue provides benefits for everyone involved. The business has the opportunity to capitalize those earnings into shareholders’ capital, while investors have the opportunity to receive additional shares of stock. A similar set of benefits emerges when the assets of a company are reassessed and additional reserve funds are identified.
Since a bonus issue is usually calculated based on the number of shares held by each investor, shareholders are motivated to acquire more shares before the next bonus issue is likely to be extended. This in turn increases the shareholder capital in the possession of the company, although it does not increase the amount of shareholders’ funds. This is because the funding that backs the shares is obtained by executing a transfer of funds from the retained earnings or the reserves.
A business that periodically extends a bonus issue to shareholders also benefits in terms of public relations. Companies that are known to follow this strategy are often attractive to investors who like the idea of receiving something for free, based on what they already have in their possession. Since a bonus issue is usually calculated based on the number of shares held by each investor, investors are motivated to acquire shares of the stock before the next bonus issue is anticipated. Investors can identify businesses that use this strategy from time to time by investigating the history and past performance of a given stock. Brokers are usually also aware of companies that use the scrip issue approach and can often advise investors if a given company shows promise of employing this strategy again in the near future.
While there are a number of ways to formulate the amount of a bonus issue, one common method is to provide each investor one additional share for a set number of shares he or she already owns. For example, company may decide to structure the bonus issue so every investor receives one share for every ten shares already in the shareholder’s possession. The same formula may be used each time a new capitalization issue is extended, or the company may evaluate the amount of the additional reserve or retained earnings and determine a different method of providing the additional shares.