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
- The bonus issue tends to bring the market price per share within a more popular price range.
- It increases the number of outstanding shares. This promotes more active trading
- The nominal rate of dividend tends to decline. This may dispel the impressions of profiteering.
- The share capital base increases and the company may achieve a more respectable size in the eyes of the investing community.
- 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.
- 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.
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