A bonus issue of shares, also known as a capitalization or scrip issue, is an issue of shares to existing company shareholders on a pro-rata basis with the shares they already hold. Instead of being paid for by the shareholders, the company pays the shares out of its accumulated profits.
A bonus issue could be helpful in various circumstances, including an alternative to paying a dividend. Rather than paying out cash dividends to shareholders, a company can use profits to pay for additional shares. For example, a bonus issue may increase a private company’s total issued share capital to make it eligible for re-registering as a public company.
Bonus Issue: A Corporate Action
A bonus issue is a corporate action that increases the number of shares owned by an individual shareholder. However, it does not increase the total value of the shareholding as the ratio of the number of shares held to the number of shares outstanding remains the same.