Advantages Of The Issues Of Bonus Shares Finance Essay

Advantages Of The tailors Of fillip Shargons Finance EssayThe term subvention write up also called as stock dividend means an extra dividend paid to divisionholders in a attach to from additional simoleons. When large fund gets accumulated display of profits of a corporation much beyond its mindsets and needs, the companionships directors whitethorn purpose to share out a part of it among the existent shareholders of social club in the form of aid. Bonus sight be paid in two forms either in currency or in form of shares. The company opens bullion bonus when it gains large amount of profits as salutary as cash to pay dividend. But many a ms, it happens that a company is not in a position to pay bonus in cash though it has enough amounts of profits because of poor cash position or because of its unfavorable effects on the working jacket crown of the company. In such a situation, the company pays a bonus to its shareholders in the form of shares a put down share thus put outd is known as a bonus share.A bonus share is a free share of stock given up to current/existing shareholders in a company, based upon the number of shares that the shareholder already owns at the time of announcement of the bonus. The important point here is, that the issue of bonus shares only increases the sum of m wizy number of shares issued and owned, but it does affect the value of the company at all. authoritative classes of shares only are allowed to bonus issues and it regards on the constitutional documents of respected company.Bonus share is free share in fixed balance to the shareholders. For utilisation ABC ltd. issues bonus share in 11 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 share and with bonus share it goes double i.e. Rs. 4 as one free share is given to shareholder based upon the number of shares he/she already has.Sometimes a company may change the number of shares in issue by capitalizing its reserve. In other words, it sack convert the right of the shareholders because each somebody will hold the same proportion of the outstanding shares as before. master(prenominal) reason for issuance is the price of the existing share has become unwieldy.Advantages of issue of bonus sharesTo the companyConservation of CashIn issuing bonus shares, cash outflow is not at all involved. The company can retain earnings as well as satisfy the bank of the shareholders to receive dividend.Keeps the EPS at a reasonable levelCompany may face problems having high earning per share both from employees and consumers. Employees may feel that they are underpaid. While consumers may feel that they are being charged too high for the companys products.Issue of bonus shares increases the number of shares and reduces the earning per share. make ups the commercialiseability of companys sharesIssue of bonus shares reduces the market price per share.Enhanc es prestige of the companyBy issuing bonus shares, the company increases its credit standing and its borrowing capacity. It reflects financial strength of the company.It helps in funding its projectsBy issuing bonus shares, the expansion and other projects of a company can be easily financed. The company need not depend on outside agencies for finances.To the ShareholdersTax benefitsWhen a shareholder receives dividend in cash, it adds to his nitty-gritty income and is tasked at usual income task drifts.Indication of higher(prenominal) future profitsIssue of bonus shares is generally an indication of higher future profits.Increase in future dividendThe shareholder will get more dividends in the future even if the company continues to offer existing cash dividend per share. postgraduate psychological valueIssue of bonus shares is usually perceived positively by the market.Limitations of Bonus IssuesFor the companyAfter the issue of the bonus shares the shareholders expectation of increment in the existing rate of dividend per share continues. It becomes really a challenging task for the company to retain the existing rate of dividend per share.Issue of bonus shares prevents new investors from becoming the shareholders of the company.For shareholdersSome shareholders may prefer cash dividend to stock dividend, such shareholders may feel disappointed (no doubt they can very well sell their bonus shares and get their money).Dividend Tax insurance in IndiaBefore 1997 in India, dividends were appraiseed in hands of the shareholders. They used to disclose the dividend income under the head Income from Other Sources and then used to pay tax on dividend at a rate that depended on their individual tax bracket.After 1997, Government of India introduced the dividend dissemination tax, according to which, when company announces dividends, it also pays the dividend distribution tax direct to the Government of India. Therefore, shareholders do not have to pay any tax they receive.The Finance Act, 1997 introduced the dividend distribution tax for the first time in India and under this system, companies used to pay dividend distribution tax directly at the rate of 10%. Here, this act benefited to those shareholders who fell in the higher than 10% tax bracket.The 2002-03 Budget reverted back to the earlier system for one year where dividends were again taxed in hands of shareholders. However, the 2003-04 Budget reintroduced the dividend distribution tax rate in India but at a higher rate of 12.5% plus surcharges. And currently the effective dividend distribution tax rate in India is 16.609%.