In today’s finance and corporate management world, companies provide numerous ways to manage their financial structure effectively. One is the most famous methods for achieving these goals are issuance of bonus shares. Bonus shares are also popularly known as scrip dividends or capitalization shares. These are the additional shares provided to existing stakeholders without any extra cost. Bonus shares and right issue shares are beneficial to companies as well as to investors. It is a strategic tool for managing financial flexibility. These bonus shares offer several advantages but consider under specific considerations that investors and companies should carefully evaluate.
There are some advantages of bonus shares
- Increased Liquidity: One of the main benefits of issuing bonus shares is the ability to enhance the liquidity of the company stocks. With an increasing number of shares in the market, bonus shares can lower the share price which leads to an affordable range for a boarder range of investors. Moreover, this lower price of shares attracts new investors to invest in the market. This influx of new investors contributes to a more active and liquid market for the company shares.
- Rewarding shareholders: Bonus shares give a way for companies to reward existing shareholders without any need for an immediate cash outflow. This is positive in favor of those companies that want to distribute profits or reserves to shareholders while preserving their cash for reinvestment in the business. This bonus share is also beneficial for shareholders as they receive additional shares in proportion to their existing shares.
- Signalling Financial Health: Issuing bonus shares is a positive signal to the market that indicates that the company is in a strong financial position as well as they are confident about its future position. It also indicates that the specific company can generate sufficient reverses and it also helps to boost the confidence of the investors. Through rewarding bonus shares, companies can strengthen their relationships with investors and improve market sentiments.
- Capital restructuring: Bonus shares allow companies to manage their capital structure with the help of converting their reserves into equity. This can also help to adjust financial ratios like earnings per share and book value per share, without the help of external financial sources. It also helps the companies to balance their equity-debt ratio, making companies more attractive to investors and creditors.
- Tax Benefits: In many jurisdictions, bonus shares are not directly subject to taxation as these are considered a reallocation of equity rather than cash. This condition can be helpful for shareholders who may prefer to pay tax on the selling of their shares.
So, Bonus shares provide a range of advantages that include liquidity enhancement, rewarding shareholders without immediate cash outflows, providing a positive signal to financial health, and giving opportunities for capital restructuring. These bonus shares enhance shareholders’ shareholding and provide benefits for future price appreciation. Bonus shares offer a way for companies to manage their reversers, adjust capital structures as well, and boost market sentiments. One can invest in many companies like 5paisa. Bonus shares are valuable tools to enhance shareholders’ value and manage financial structures for both companies and investors.
