Why bonus issue matters to a first-time founder
Shareholders receive more shares and pay no cash in. The company usually moves reserves into share capital to fund the issue, in proportion to the shares people already hold. The company raises nothing. Each holder has more shares, but the firm is not worth more merely because the count went up. The price per share often adjusts down, so the holding is worth about the same.
Examples of bonus issue
A listed company in India has 10 million shares at a market price of INR 120. It makes a 1-for-2 bonus issue, funded by a transfer from reserves to share capital. A holder of 200 shares receives 100 more and pays nothing. The company receives no new money. If total market value stays the same, the price moves from INR 120 to INR 80, and that holder’s stake is still INR 24,000 before tax and dealing costs.
Common misunderstanding
A bonus issue is not a bonus of extra pay. Free, in this setting, means the shareholder does not pay cash. It does not mean the shareholder has been given extra wealth. The issue is also called a scrip issue or a capitalisation issue. A stock dividend is a close cousin, because it also pays shares instead of cash, but the company-law steps and the tax are not the same in every country. A bonus issue does not bring new money into the company.
When to use it
Use it when reserves are being turned into share capital and holders need to see that their percentage can stay in line while the price per share falls. Check company law, the constitution, and tax locally before you announce the issue. If the company needs cash, a bonus issue will not raise it.