Bonus shares are free stocks that are distributed to a company’s shareholders. In cases when the company has surplus profits, bonus shares may be paid out to shareholders without the requirement of additional share purchases or additional fees for accepting these shares.
Bonus refers to any excess dividend that is paid out to shareholders. If a company makes much more than it expects to, it is possible for the directors to decide to distribute the surplus, whether in cash or in the form of extra shares.
There are times in which, despite the company’s excellent performance, the distribution of cash is not the best option. This may happen if the company does not have much cash on hand or if the distribution of cash will affect the working capital necessary to the company’s continued operations and growth. In this case, the bonus comes in the form of shares.
The kind of shares that may be distributed under this arrangement depends on the policies set by the company. It is possible that not all kinds of shares may be included for bonus issue. Also, the issue of these free shares depends on the number of shares that each holder already owns, so that even after bonus shares have been issued, the ratio of shares held by each shareholder remains the same.
Once the company announces that a bonus issue will be made, a date for the book closure is generally set, giving the company time to process the share transfers.
