Bonus Shares

The undistributed profits, after the necessary provisions for taxation, are the property of the equity shareholders and the company for distribution as dividends to them may use the same. But the sound financial policy demands that some of the profits at least must be ploughed back into the business.

Thus when a company has accumulated substantial amount of past profits as might be found in the credit of capital reserves, revenue or general reserve of profit and loss account, it is desirable to bring the amount of issued share capital closer to the actual capital employed as represented by the net assets (Assets – Liabilities) of the company.

This would reflect the true amount of capital invested by the shareholders in the company. For example, the capital, which the shareholders have contributed for shares, is clearly visible since this was contributed in cash. But the capital, which they have contributed in the form of accumulated profits, remains unknown because this was not a direct contribution in cash. In order to rectify these, accumulated profits in full or in part are capitalized, that is, accumulated profits are converted into shares.

Shares are distributed free of charge and therefore are known as Bonus Shares, which are given to existing shareholders pro rata to their holdings. It may be added the bonus shares may be issued to make up the existing partly paid shares as fully paid. However, the share premium account and capital redemption reserve account respectively could be used only for issuing fully paid bonus shares. But, the partly paid shares can be made fully paid up by using distributable profits.