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Monday, February 6, 2023

Why a Company Grants Bonus Shares?

Bonus shares are additional shares granted to current owners by a firm as a bonus when the company is unable to pay a dividend to its shareholders while making a profit for the quarter. Only a corporation that has made a substantial profit or has large free reserves that cannot be used for any purpose and can be dispersed as dividends has the ability to issue bonus shares to its owners. These bonus shares meaning, on the other hand, are distributed to shareholders in proportion to their current holding in the company.  Thus, below are some of the benefits of bonus shares.

·       Allows the company to conserve cash– Bonus shares help the company to use that cash to pay a dividend to shareholders. Any dividends paid to shareholders in excess of the amount required for the company to pay a dividend to the public would be made available to shareholders in cash. The company would not need to sell any assets to raise the funds to pay dividends.

·       It has a signaling effect– Shareholders of a company are better informed about its financial condition. This can be because of the bonus shares and dividends. These signals can be used to create awareness among investors. By increasing the number of shares that would be issued and, therefore, increasing the flow of funds. It is important to recognize that the share price does not reflect the number of shares issued but the state of the company.

·       Helps to satisfy the shareholders– Shareholders are more willing to accept a dividend and share in the company’s future profits. If the shareholders are satisfied with the company’s performance, they will be willing to sell more shares. The company will be able to attract more investors and more money to its coffers. This will help the company to grow.

·       Increases the participation of smaller investors- Increases the participation of smaller investors– This means that smaller shareholders will have a larger share of the company’s profits by receiving a larger proportion of the company’s profits than if they had not received the bonus shares. It can be argued that this is a reasonable benefit. As well as the participation of individuals who have not owned the company for a long time- rather than be forced to sell their shares.

·       Increases the company’s size- This means that, rather than being a passive investor, a shareholder is now an active investor. As well as having a smaller equity share, the shareholder has an interest in company management and is thus more likely to invest in new ventures that will please the shareholders. This means that the size of the company’s business grows as the bonus shares are distributed.

The use of bonus shares is becoming an increasingly important part of the company’s business. Companies are increasingly able to use bonus shares to substantially increase the number of funds that they can distribute to shareholders. Thus, it is important that a shareholder should know how to open demat account online.

The use of bonus shares is becoming increasingly important because it allows companies to use their current cash reserves to pay dividends. Moreover, the percentage of the shares issued will be increased proportionately to the current shares’ holdings. This will encourage more investors to join the company and increase the number of shares issued.

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