Bonus issues, also known as scrip issues or capitalization issues, are a form of corporate action where a company distributes additional shares to existing shareholders without receiving any cash payment in return. Instead, these additional shares are issued as a bonus to shareholders based on their existing holdings. Here are some key points regarding bonus issues:

1. Purpose: Bonus issues are often used by companies as a way to reward shareholders without affecting the company’s cash reserves. By issuing bonus shares, companies can increase the number of shares outstanding without diluting the ownership stake of existing shareholders.
2. Source of Funds: Unlike cash dividends, which require companies to distribute cash from their profits, bonus issues do not involve the outflow of cash. Instead, bonus shares are issued by capitalizing retained earnings, share premium, or other reserves, thereby converting these reserves into share capital.
3. Impact on Shareholders: Shareholders receive additional shares in proportion to their existing holdings. For example, if a company declares a bonus issue of one share for every five shares held, a shareholder owning 100 shares would receive 20 additional shares as a bonus. Bonus issues do not change the overall value of the shareholders’ investment, but they increase the number of shares they hold.
4. Impact on Share Price: Bonus issues do not have a direct impact on the company’s market capitalization or shareholders’ wealth. Since the total value of the company remains unchanged after a bonus issue, the share price typically adjusts downward to reflect the increased number of shares outstanding. However, bonus issues may lead to increased liquidity and trading activity in the company’s shares.
5. Accounting Treatment: From an accounting perspective, bonus issues involve a transfer of reserves to share capital. The company’s balance sheet reflects an increase in share capital and a corresponding decrease in reserves. There is no impact on the company’s total equity or net assets.
6. Regulatory Requirements: Companies must comply with regulatory requirements and obtain necessary approvals from regulatory authorities, such as stock exchanges and securities commissions, before implementing bonus issues. Regulatory bodies may impose certain conditions and disclosure requirements to ensure transparency and protect the interests of investors.
7. Tax Implications: Bonus issues may have tax implications for shareholders, depending on their jurisdiction and individual tax circumstances. In some jurisdictions, the receipt of bonus shares may be treated as a non-taxable event, while in others, it may be subject to taxation as a capital gain.

Overall, bonus issues can be an effective strategy for companies to reward shareholders, increase liquidity in their shares, and enhance shareholder value. However, companies should carefully consider the implications of bonus issues and communicate the rationale and impact to shareholders effectively.