According to the Oxford English Dictionary the word bonus is a noun meaning a sum of money added seasonally to a person’s wages for good performance, or an extra dividend or issue paid to shareholders. It also means an unexpected and welcome event. Going by the meaning, a bonus issue in the stock markets indeed has an element of surprise. So recently when Reliance Industries decided to issue bonus shares there was jubilation. However, experts say that the heart-warming feeling that follows the announcement of a bonus issue mainly emanates from the sudden occurrence of the event, which is seen as a pleasant surprise by shareholders, and no other reason. We tried to figure out the positives and negatives of a bonus issue.

WHAT IS A SHARE ISSUE?

Every company needs capital for its inception. This is provided by the promoter. Say, if a promoter invests Rs 10,000 to start a company, this amount, which is called equity share capital, can be divided into shares of, say, Rs 10. So at inception the owner owns 1,000 shares or 100 per cent of the company. When the company starts earning profits, the retained earning, which is part of the post-tax net profits that the promoter does not take as dividends and reinvests in the company, is added to the company’s equity capital. This raises its net worth. At some stage the company’s promoter decide to sell some stake through an initial public offer (IPO) to investors who might be willing to pay a premium over the face value (in this case Rs 10). When an investor buys a stake in a company he becomes a shareholder.

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