Bonus Issue Announcement

Only available on StudyMode
  • Download(s) : 32
  • Published : December 17, 2010
Open Document
Text Preview
EFFECT OF BONUS ISSUE ANNOUNCEMENT ON STOCK RETURNS
Bonus Shares
The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits - much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the company when it has large accumulated profits as well as cash to pay dividend. Many a time, a company is not in a position to pay bonus in cash in spite of sufficient profits because of unsatisfactory cash position or because of its adverse effects on the working capital of the company. In such a position, the company pays a bonus to its shareholders in the form of shares; a free share thus issued is known as a bonus share. A bonus share is a free share of stock given to current/existing shareholders in a company, based upon the number of shares that the shareholder already owns at the time of announcement of the bonus. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus share is free share in fixed ratio to the shareholders. for exp..reliance ind. ltd. issue bonus share in 1:1 ratio and Rs.13.00 as dividend/share Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. Main reason for issuance is the price of the existing share has become unwieldy. Benefits of bonus issue

* Conservation of Cash. The issue shares allows the company to declare a dividend without using up the cash that may be used to finance the profitable investment opportunities within the company and thus company can maintain its liquidity position. * Under Financial Difficulty and Contractual Restrictions. When a company faces stringent cash difficulty and is not in a position to distribute dividend in cash, or where certain restrictions to pay dividend in cash are put under loan agreement, the only way to satisfy the shareholders or to maintain the confidence of the shareholders is the issue of bonus shares. * Remedy for Under-Capitalization. In the state of under-capitalization, the rate of divided is very much high. In order to lower down the rate of dividend, the company issued bonus shares instead of paying dividend in cash. * Widening the Share Market. If the market value of a company's share is very high, it may not appeal to small investors. By issuing bonus shares, the rate of dividend is lowered down and consequently share price in the market is also brought down to a desired range of activity and thus trading activity would increase in the share market. Now small investors may get an opportunity to invest their funds in low priced shares. * Economical Issue of Securities. The cost of issue of bonus shares is the minimum because no underwriting commission, brokerage etc. is to be paid on this type of issue. Existing shareholders are allotted bonus shares in proportion to their present holdings. Stock prices as a rule adjust to new information. In an efficient market, this adjustment is instantaneous and accurate. Event studies to test market. Efficiency, therefore, examine the speed of adjustment of stock prices to the release of new, relevant information to investors. One such 'event' is the announcement of bonus issues by companies. While accountants view...
tracking img