Bonus Shares

Bonus shares can be issued only out of free reserves built out of the genuine  share premium collected in cash only

Reasons for Issuing Bonus Shares

1. The bonus issue tends to bring the market price per share within a more popular price range.
2. It increases the number of outstanding shares. This promotes more active trading
3. The nominal rate of dividend tends to decline. This may dispel the impressions of profiteering.
4. The share capital base increases and the company may achieve a more respectable size in the eyes of the investing community.
5. Shareholders regard a bonus issue as a firm indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividends.
6. It improves the prospects of raising additional funds. In recent years many firms have issued bonus shares prior to the issue of convertible debentures or other financing instruments.