Bonus Issue

1. Definition

A Bonus Issue (also known as a Scrip Issue or Capitalization of Reserves) is a corporate action where a company issues free additional shares to existing shareholders. Instead of raising new capital, the company converts its accumulated earnings or capital surplus into share capital.

2. Accounting Effect

There is no change in the total net assets (equity) of the company. It is merely a reclassification within the shareholders' equity section. * Debit: Retained Earnings or Capital Surplus (Decrease) * Credit: Capital Stock (Increase)

3. Purpose & Impact

3.1. Signal of Health

It is often perceived as a positive signal, indicating that the company is confident in its financial position and has sufficient reserves to capitalize.

3.2. Liquidity Improvement

By increasing the number of outstanding shares and lowering the price per share (due to dilution), the stock becomes more affordable to retail investors, potentially increasing trading liquidity.

3.3. Ex-Rights Adjustment

Since the intrinsic value of the company remains the same while the number of shares increases, the stock price is adjusted downward proportionally on the ex-date. This adjustment is to ensure the total market capitalization remains theoretically unchanged.