A bonus issue, also known as a bonus share or scrip issue, is a corporate action in which a company distributes additional shares to its existing shareholders without any consideration. These additional shares are issued on a pro-rata basis, meaning that shareholders receive bonus shares in proportion to their existing holdings.

Here are key points about bonus issues:

1. **Purpose:** Companies issue bonus shares as a way to reward existing shareholders without altering the total equity capital or financial structure of the company. It does not involve the receipt of cash or other assets by the company from shareholders.

2. **Proportional Distribution:** Bonus shares are distributed to existing shareholders in proportion to their current shareholding. For example, if a company declares a bonus issue of 1:1, each shareholder receives one additional share for every share they currently own.

3. **Reasons for Bonus Issues:**
– **Capitalization of Reserves:** Companies may issue bonus shares by capitalizing their reserves, such as retained earnings or share premium. This allows the company to convert its accumulated profits into share capital.
– **Shareholder Value:** Bonus issues are often seen as a way to enhance shareholder value by increasing the number of shares held by investors without diluting their ownership percentage.

4. **Impact on Share Price:**
– In theory, a bonus issue does not affect the overall market value of the company. Since the bonus shares are distributed at no cost, the market price per share should adjust to reflect the new share structure without any net change in the total market capitalization.

5. **Bookkeeping Entry:**
– When a company issues bonus shares, it reduces a reserve account (e.g., retained earnings or share premium) on the balance sheet and increases the share capital. The company’s total equity remains the same, but the composition changes with the conversion of reserves into share capital.

6. **Signal to the Market:**
– A bonus issue is often viewed positively by the market as a signal of the company’s confidence in its financial health and future prospects. It can be interpreted as a gesture of sharing the company’s success with existing shareholders.

7. **Tax Implications:**
– The tax treatment of bonus issues can vary by jurisdiction. In some cases, the receipt of bonus shares may not trigger an immediate tax liability for shareholders, but tax laws should be carefully considered.

Bonus issues are distinct from stock splits or stock dividends, as they involve the issuance of additional shares without any charge to existing shareholders. Shareholders benefit from an increase in the number of shares they hold, but the overall ownership interest in the company remains the same. Companies typically announce bonus issues through a resolution passed by the board of directors and subsequently seek approval from shareholders in a general meeting.