When the price falls, the liquidity of the share improves, and that to me is the primary reason for a company to issue bonus shares. Tax benefits : Bonus shares increase the wealth of shareholder when they receive dividend in … If the subscribed capital and paid up capital exceeds the amount of authorised capital by the subsequent issue of bonus shares, a resolution should be passed at the general body meeting to increase the amount of authorised capital, if necessary. From the company’s view point: (a) By issuing bonus shares shareholders are to be satisfied when the company cannot pay dividend in cash due to shortage of liquid funds, i.e., profit can be distributed without distributing the liquid resources, viz., cash. 2. Declaration of bonus shares in lieu of dividend is not allowed. If not, a copy of the resolution passed at the general body meeting in order to make the proper change of the Articles of Association should be produced. Advantages 4. Contingent liabilities which may have a bearing on net profits shall be turned into consideration for the calculation of minimum residual reserve of 40%. 12. 2. For the purpose of capitalisation of profits or reserve fully paid shares may be issued free of cost to the shareholders in proportion to their existing holdings or partly paid shares held by them may be made fully paid without any payment being received from them. Further application for issue of bonus shares may be made only after 36 months from the date of an earlier bonus issue. Guidelines 4. Companies Act and Bonus Issue 3. The Company should furnish a resolution passed at general body meeting for bonus issue before an application is made to the Controller of Capital Issues. (2) Not taxable: Bonus shares are not taxable. 7. (b) A distribution of the accumulated profits to the members without any release of the company’s asset. 3. Issue of bonus share raises the overall share capital of the company, which reflects a good impression over the investors and increases the image of the company in the market. When the company has sufficient undistributed profits; iii. Advantages: From the Investor’s Point of View. Report a Violation 10. When the company does not find sufficient amount to pay cash dividend, it may pay stock dividend. Accounting, Bonus Shares, Capital, Company, India, Shares. When the necessary consent has been obtained from the Controller of Capital Issues. 30% of the average profits (before tax but after providing preference dividend) for the previous 3 years should at least yield a dividend of 10% on the expanded equity capital. Not more than two bonus issues will be allowed to a company over a period of five years. There should be a provision in the Articles of Association regarding bonus issue. Image Guidelines 4. The following particulars appear in the Balance Sheet of Bharat Ltd. as on 31st December: The company passed the following resolutions: 1. When a company desires to immobilize any portion to its accumulated profits, it may issue Bonus Shares to its members. Advantages of Bonus shares: No Tax Implication on purchase of bonus shares; Beneficial for investors looking for long-term investments; Increased confidence in the operations of the company; More dividends if the company decides to pay in the future; Increased Liquidity; Reduced Entry barriers for new investors; Conclusion That the General Reserve be utilised in making the partly paid shares as fully paid up. When any profit or reserve of a company is permanently acquired by it, the amount so acquired is said to have been capitalized. All the shareholders exercised the option in (3) above. The directors now propose to utilize the necessary amount from the general reserve for the purpose of declaring a bonus of Rs 2, 50,000 as fully paid bonus shares. (4) To repay the debentures at a premium of 4%. Issue of bonus shares results in the conversion of the company's profits into share capital. 10. One Bonus share is being issued for every four Equity Shares held at present. 4. If the application is made both for the purpose of issuing bonus shares and right shares at the same time, permission should be given first f’- bonus issue and later for right issue. Free of Cost Advantages Of Bonus Shares There is no need for investors to pay any tax on receiving bonus shares. Financial Management, India, Divisible Profit, Dividend Policy, Bonus Shares. For this purpose, general reserve should be utilised to the minimum extent. The procedures to be followed for the issue of Bonus Shares are as follows: 1. These shares are known as ‘Bonus Shares’. Bonus shares as an alternative for dividend payouts help in retaining the shareholders’ trust in the concerned company. When the proposal of the Board of Directors about such bonus issue has been approved by the shareholders in the general meeting; iv. The disparity between effective capital and actual capital can be eliminated. 2. 16. Illustration 3 (To make partly paid shares as fully paid up): A Limited Company with a subscribed capital of Rs 5,00,000 in shares of Rs 10 each had called up Rs 8 per share: As the Company built up a big reserve, it was resolved that a bonus of Rs 1,00,000 would be declared but of the reserve to be applied in making the shares fully paid. Bonus or capital bonus is given by making partly paid shares as fully paid without getting cash from the shareholders or it is given by the issue of free fully paid shares. 4. It is an inexpensive way to raise capital for expansion. 14. Increases the marketability of company’s shares: Issue of bonus shares reduces the market price per share. The Bonus Shares are issued to the existing shareholders and not to outsiders. Plagiarism Prevention 5. 13. The Balance Sheet of India Ltd. as on 31st December is given below: At the annual general meeting it was resolved: (2) To issue one bonus share for every four shares held as on date of last Balance Sheet. 14. Unless the partly paid shares are made fully paid, bonus issues are not permitted. 8. Under the circumstances, the company issues new shares to the existing shareholders in lieu of paying dividend in cash. 15. Advantages of Issuing Bonus Shares: A. At the annual general meeting it was resolved: (1) To pay a dividend of 10%. Between two successive announcements of bonus issues by a company should be a time lag of at least 36 months. At the same time, the directors’ intention regarding the rate of dividend to be declared in the year immediately after the bonus issue should also be mentioned. The advantages of issuing bonus shares to the shareholders and creditors are as follows:- 1. Capital Redemption Reserve, if any, for the computation of the said 40% of the residual reserve, is not to be taken into consideration. (2) To issue one bonus share for every four shares held as on date of last Balance Sheet. Give journal entries in the books to record the transaction. 6. Advantages of the Issue of Bonus Shares 3. An auditor’s certificate should be annexed to the application which will indicate that the guidelines for the issue of bonus shares prescribed by the government are fully met and the data that are furnished in the application is true and correct to the best of his knowledge. Companies which can not pay a dividend in the form of cash because of liquid funds crisis in spite of earning a good profit as they want to retain some good amount of profit in their reserves issues additional shares to its existing shareholders which are known as bonus shares. No bonus issue will be permitted if there is sufficient reason to believe that the company has defaulted in respect of the payment of statutory dues of the employees such as contribution of provident fund, gratuity, bonus etc. So if the bonus issue is 1:1 which means they are issuing one additional share for each existing share, the market price of the share will roughly halve.
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