Advantages Of The Issues Of Bonus Shares Finance Essay

The term fillip issue besides called as stock dividend means an excess dividend paid to stockholders in a company from extra net incomes. When big fund gets accumulated out of net incomes of a company much beyond its outlooks and demands, the company ‘s managers may make up one’s mind to portion out a portion of it among the existing stockholders of company in the signifier of fillip. Bonus can be paid in two signifiers either in hard currency or in signifier of portions. The company pays hard currency fillip when it additions big sum of net incomes every bit good as hard currency to pay dividend. But many a times, it happens that a company is non in a place to pay fillips in hard currency though it has adequate sums of net incomes because of hapless hard currency place or because of its unfavourable effects on the on the job capital of the company. In such a state of affairs, the company pays a fillip to its stockholders in the signifier of portions ; a free portion therefore issued is known as a fillip portion.

A fillip portion is a free portion of stock given to current/existing stockholders in a company, based upon the figure of portions that the stockholder already owns at the clip of proclamation of the fillip. The of import point here is, that the issue of fillip portions merely increases the entire figure of portions issued and owned, but it does impact the value of the company at all.

Certain categories of portions merely are allowed to bonus issues and it depends on the constitutional paperss of well-thought-of company.

Bonus portion is free portion in fixed ratio to the stockholders. For illustration ABC ltd. issues fillips portion in 1:1 ratio where the dividend is 20 % and Rs.10.00 as face value dividend/share this means that the company will be giving Rs. 2 of dividend per portion and with fillips portion it goes dual i.e. Rs. 4 as one free portion is given to stockholder based upon the figure of portions he/she already has.

Sometimes a company may alter the figure of portions in issue by capitalising its modesty. In other words, it can change over the right of the stockholders because each person will keep the same proportion of the outstanding portions as before. Main ground for issue is the monetary value of the bing portion has become unmanageable.

Advantages of issue of bonus portions:

To the company:

Conservation of Cash:

In publishing fillip portions, hard currency escape is non at all involved. The company can retain net incomes every bit good as satisfy the desire of the stockholders to have dividend.

Keeps the EPS at a sensible degree:

Company may confront jobs holding high gaining per portion both from employees and consumers. Employees may experience that they are underpaid. While consumers may experience that they are being charged excessively high for the company ‘s merchandises.

Issue of bonus portions increases the figure of portions and reduces the earning per portion.

Increases the marketability of company ‘s portions:

Issue of bonus portions reduces the market monetary value per portion.

Enhances prestigiousness of the company:

By publishing fillip portions, the company increases its recognition standing and its adoption capacity. It reflects fiscal strength of the company.

It helps in financing its undertakings:

By publishing fillip portions, the enlargement and other undertakings of a company can be easy financed. The company need non depend on outside bureaus for fundss.

To the Stockholders:

Tax benefits:

When a stockholder receives dividend in hard currency, it adds to his entire income and is taxed at usual income revenue enhancement rates.

Indication of higher future net incomes:

Issue of bonus portions is by and large an indicant of higher future net incomes.

Increase in future dividend:

The stockholder will acquire more dividends in the hereafter even if the company continues to offer bing hard currency dividend per portion.

High psychological value:

Issue of bonus portions is normally perceived positively by the market.

Restrictions of Bonus Issues:

For the company:

After the issue of the fillip portions the stockholders ‘ outlook of increase in the bing rate of dividend per portion continues. It becomes truly a challenging undertaking for the company to retain the bing rate of dividend per portion.

Issue of bonus portions prevents new investors from going the stockholders of the company.

For stockholders:

Some stockholders may prefer hard currency dividend to stock dividend, such stockholders may experience defeated ( no uncertainty they can really good sell their fillip portions and acquire their money ) .

Dividend Tax Policy in India:

Before 1997 in India, dividends were taxed in custodies of the stockholders. They used to unwrap the dividend income under the caput ‘Income from Other Sources ‘ and so used to pay revenue enhancement on dividend at a rate that depended on their single revenue enhancement bracket.

After 1997, Government of India introduced the dividend distribution revenue enhancement, harmonizing to which, when company announces dividends, it besides pays the dividend distribution revenue enhancement straight to the Government of India. Therefore, stockholders do non hold to pay any revenue enhancement they receive.

The Finance Act, 1997 introduced the dividend distribution revenue enhancement for the first clip in India and under this system, companies used to pay dividend distribution revenue enhancement straight at the rate of 10 % . Here, this act benefited to those stockholders who fell in the higher than 10 % revenue enhancement bracket.

The 2002-03 Budget reverted back to the earlier system for one twelvemonth where dividends were once more taxed in custodies of stockholders. However, the 2003-04 Budget reintroduced the dividend distribution revenue enhancement rate in India but at a higher rate of 12.5 % plus surcharges. And presently the effectual dividend distribution revenue enhancement rate in India is 16.609 % .