Bonus shares are a way for companies to reward shareholders by providing additional shares free of charge, in proportion to the number they currently hold. It’s essentially a conversion of a company’s reserves into share capital. These shares are issued out of accumulated earnings and are seen as a sign of a company’s prosperity. This method doesn’t change the total value of the shareholder’s investment but increases the number of shares they own. For UK companies, the issuance of bonus shares involves a series of steps:
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1. Determine the Suitability
- Availability of Reserves: The first consideration is to ensure the company has enough accumulated profits or reserves to support the issuance. These reserves are then capitalized to issue bonus shares.
- Company’s Financial Health: Before issuing bonus shares, it’s prudent to ensure that the company is in good financial health. This avoids a scenario where bonus shares are issued and then the company faces liquidity issues.
2. Board Meeting
The directors convene a meeting to deliberate on the proposal of issuing bonus shares. If agreed upon, they will:
- Approve the Bonus Issue: The board will pass a resolution approving the bonus shares’ issuance.
- Set the Record Date: This date will determine which shareholders are eligible to receive bonus shares. Shareholders on the company’s register by this date will be the beneficiaries.
- Schedule a General Meeting: The shareholders have to approve the bonus issue, so a general meeting date is scheduled for this purpose.
3. Notice of General Meeting
A notice is sent out to all shareholders informing them of the general meeting’s date and agenda, including the proposal for the bonus issue.
4. Shareholders’ Approval
At the general meeting, shareholders vote on the proposed issuance. For the proposal to pass, it typically requires a majority, often a supermajority, of the shareholders’ vote.
5. Update the Articles of Association
Some companies may have stipulations in their Articles of Association regarding the issuance of bonus shares. If the current Articles don’t allow for such an issuance, they will need to be altered, which again requires shareholder approval.
6. Application to the Registrar
Once the bonus shares have been approved by shareholders, the company must inform the Companies House (the UK’s registrar of companies) about the bonus issue. Relevant forms, along with the board’s resolution and amended Articles of Association (if they were changed), must be submitted.
7. Issuance and Listing
After all formalities are complete:
- Issue Bonus Shares: The company can then issue bonus shares to the shareholders based on the record date. Share certificates or dematerialised credits will be issued/updated accordingly.
- Update Share Capital Details: The company’s paid-up share capital details will be updated to reflect the bonus shares’ issuance.
- Listing on Stock Exchanges: If the company is publicly traded, they will have to coordinate with stock exchanges to list the new bonus shares, ensuring they are available for trading.
8. Communication to Shareholders
Post issuance, it’s essential to keep shareholders informed. They should receive:
- New Share Certificates: If they still hold physical certificates, new ones reflecting the bonus shares should be dispatched.
- Intimation Letter: An official communication outlining the details of the bonus issue, including the number of bonus shares allotted.
Benefits and Considerations of Bonus Shares
While the steps above outline the process, it’s also worth noting the significance of issuing bonus shares:
- No Outflow of Cash: Unlike dividends, which require a cash payout, bonus shares capitalise on accumulated profits, ensuring the company’s cash reserves remain intact.
- Increased Liquidity: With more shares in circulation, trading volumes can increase, potentially enhancing liquidity in the stock.
- Attractive to Investors: A bonus issue often portrays the company in a positive light, suggesting strong financial health.
However, it’s crucial for companies to ensure that the issuance doesn’t dilute earnings or give a false impression of prosperity. Regular issuance without a fundamental improvement in the company’s operations can be misleading for investors.
While the issuance of bonus shares in UK companies follows a structured process, it’s as much a strategic decision as it is a procedural one. It’s essential for company management to weigh the benefits against potential drawbacks and ensure that such an issuance aligns with the company’s long-term goals.