Bonus share

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Bonus shares explained

Bonus shares are free, fully paid shares given to current shareholders. They are issued in a bonus issue, usually based on how many shares a shareholder already owns. The company uses its own funds—by capitalizing reserves or retained earnings—to issue these new shares, increasing issued share capital without creating new wealth for shareholders at the moment of issue.

When a bonus issue is announced, the company sets a record date and may temporarily close the share transfer register (book closure) to ensure the bonus shares go to the correct owners.

Eligibility and ratio: Only certain classes of shares may be entitled to bonus issues, depending on the company's rules, and the new shares are issued in a fixed ratio to existing holdings (for example, one new share for every two you own).

Capitalization and ownership: The process preserves each shareholder's proportional ownership in the company, since the bonus shares are allocated in the same proportion as before.

Legal and accounting notes: In some jurisdictions, the share premium account can be used to fund fully paid bonus shares. Because no cash changes hands, a bonus issue is not a dividend at the time of receipt and does not create new wealth for the shareholders. It is a reallocation within the company's capital accounts, similar to a stock split, but with a key difference: a bonus issue changes only issued share capital (and possibly outstanding shares), while a stock split may also affect the company's authorized share capital.

Tax implications: Bonus shares are usually not taxed as a dividend when received, but potential capital gains tax may apply when you later sell the shares.