Bonus Issue Vs. Stock Split Option: Which One Is The Best Option For The Company?

Whether to opt for a bonus issue or a stock split ultimately depends on the specific goals and circumstances of the company.

A bonus issue is a way for a company to distribute additional shares to its existing shareholders, typically proportionate to their current holdings.

This can increase the liquidity of the company’s shares and can make them more accessible to a broader range of investors. A bonus issue can signal to the market that the company is financially strong and has a positive outlook.

On the other hand, a stock split involves dividing each outstanding share into multiple shares. For example, a 2-for-1 stock split would turn one share into two.

Stock splits can increase the liquidity of the company’s shares and make them more affordable to a broader range of investors. Still, they don’t have the same impact on the company’s financial position as a bonus issue.

The best option for a company will depend on various factors, including its financial position, market conditions, and investor relations. Generally, companies with a robust financial situation and a positive outlook may opt for a bonus issue. 

Those wanting to make their shares more affordable for a broader range of investors may opt for a stock split.

It’s important to note that both bonus issues and stock splits can have implications for the company’s financial performance and market perception, so it’s essential for the company to carefully consider its options and consult with financial and legal advisors before making a decision.

Let’s learn more about how these two opinions work.

What is the Bonus Issue option? And how does it work

A bonus issue, also known as a stock dividend or a scrip issue, is a way for a company to distribute additional shares to its existing shareholders, typically proportionate to their current holdings.

This means that if a shareholder owns 100 shares of a company before a bonus issue, they will receive an additional 100 shares of the same stock after the bonus issue. The terms of the bonus issue determine the number of shares a shareholder receives.

Here’s how a bonus issue works:

  1. The company’s board of directors approves the bonus issue and announces the details to the public.
  2. The company issues additional shares to its existing shareholders. This does not result in any cash inflow for the company, as the stakes are being redistributed.
  3. The total number of outstanding shares increases, which can dilute the ownership percentage of each shareholder.
  4. The stock price per share will typically adjust downward to reflect the increased number of outstanding shares.
  5. The bonus issue can signal to the market that the company is financially strong and has a positive outlook, as it can distribute additional shares to its shareholders.
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It’s important to note that bonus issues can have tax implications for shareholders, as they may be subject to capital gains taxes on the additional shares received.

In some cases, bonus issues may also be subject to regulatory approval, particularly if they can impact the company’s financial position or market perception.

Situations that the Company Might Choose Bonus Issue Option

A company may choose to opt for a bonus issue in the following situations:

  1. Increased Liquidity: By issuing additional shares, the company can increase the liquidity of its stock, making it more accessible and attractive to a wider range of investors.
  2. Positive Financial Position: A bonus issue can signal to the market that the company is financially strong and has a positive outlook, improving its market perception and boosting investor confidence.
  3. Retain Earnings: By issuing a bonus issue, a company can distribute its earnings to its shareholders without paying a cash dividend, which can help it retain more of its cash for future growth and expansion.
  4. Attract Investors: By making its stock more accessible and affordable to a broader range of investors, a bonus issue can help a company attract more investment and build a more extensive shareholder base.
  5. Avoid Dividend Tax: In some countries, bonus issues are taxed differently than cash dividends and may be subject to lower tax rates. This can be an advantage for companies that want to distribute earnings to their shareholders while minimizing their tax liability.

It’s important to note that while a bonus issue can have several benefits, it can also have implications for the company’s financial position and market perception, so it’s essential for the company to carefully consider its options and consult with financial and legal advisors before making a decision.

Situations that the Company Should Not Choose Bonus Issue Option

A company may choose not to opt for a bonus issue in the following situations:

  1. Weak Financial Position: If a company faces financial difficulties or has a soft balance sheet, a bonus issue may not be an appropriate option as it can signal to the market that the company is struggling and may not have a positive outlook.
  2. Low Market Demand: If market demand for the company’s stock is low, issuing additional shares through a bonus issue may not increase liquidity and attract more investors.
  3. Dilution of Ownership: A bonus issue results in an increase in the number of shares outstanding, which can dilute the ownership percentage of each shareholder. This can be disadvantageous for shareholders who value their control over the company.
  4. Tax Implications: As mentioned, bonus issues can have tax implications for shareholders, as they may be subject to capital gains taxes on the additional shares received. In some cases, the tax implications outweigh the benefits of the bonus issue.
  5. Regulatory Restrictions: In some cases, bonus issues may be subject to regulatory approval, particularly if they can impact the company’s financial position or market perception. A bonus issue may not be an option if a company faces regulatory restrictions.
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It’s essential for a company to carefully consider its options and weigh the pros and cons of a bonus issue before making a decision.

If a company is unsure, it can consult with financial and legal advisors to help determine the best course of action.

What is Stock Split Option? and how does it work

A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more to existing shareholders. The new shares are issued proportionately to each shareholder’s existing holdings, so if a shareholder owns 100 shares of a company before a stock split, they will receive an additional 100 shares of the same stock after the break. The terms of the stock split determine the number of shares a shareholder receives.

Here’s how a stock split works:

  1. The company’s board of directors approves the stock split and announces the details to the public.
  2. The company issues additional shares to its existing shareholders. This does not result in any cash inflow for the company, as the stakes are simply being redistributed.
  3. The total number of outstanding shares increases, which can dilute the ownership percentage of each shareholder.
  4. The stock price per share will typically adjust downward to reflect the increased number of outstanding shares.
  5. The stock split can signal to the market that the company is financially strong and has a positive outlook, as it can increase the number of its outstanding shares.

It’s important to note that stock splits can have tax implications for shareholders, as they may be subject to capital gains taxes on the additional shares received. In some cases, stock splits may also be subject to regulatory approval, particularly if they have the potential to impact the company’s financial position or market perception.

Situations that the Company Might Choose Stock Split Option

A company may choose to opt for a stock split in the following situations:

  1. Increased Liquidity: By issuing additional shares, a stock split can increase the liquidity of a company’s stock, making it more accessible and attractive to a wider range of investors.
  2. Positive Financial Position: A stock split can signal to the market that the company is financially strong and has a positive outlook, which can improve its market perception and boost investor confidence.
  3. Attract Investors: By making its stock more accessible and affordable to a wider range of investors, a stock split can help a company attract more investment and build a larger shareholder base.
  4. Lower Share Price: If a company’s share price is high, a stock split can reduce the price per share, making it more affordable and accessible to a wider range of investors.
  5. Simplify Trading: A lower share price can also simplify the trading process, as shares can be bought and sold in smaller denominations, which can be more convenient for investors.
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It’s important to note that while a stock split can have several benefits, it can also have implications for the company’s financial position and market perception, so it’s essential for the company to carefully consider its options and consult with financial and legal advisors before making a decision.

Situations that the Company Should Not Choose Stock Split Option

A company may choose not to opt for a stock split in the following situations:

  1. Weak Financial Position: If a company faces financial difficulties or has a weak balance sheet, a stock split may not be an appropriate option, as it can signal to the market that the company is struggling and may not have a positive outlook.
  2. Low Market Demand: If market demand for the company’s stock is low, issuing additional shares through a stock split may not increase liquidity and attract more investors.
  3. Dilution of Ownership: A stock split results in an increase in the number of shares outstanding, which can dilute the ownership percentage of each shareholder. This can be disadvantageous for shareholders who value their control over the company.
  4. Tax Implications: As mentioned, stock splits can have tax implications for shareholders, as they may be subject to capital gains taxes on the additional shares received. In some cases, the tax implications may outweigh the benefits of the stock split.
  5. Regulatory Restrictions: In some cases, stock splits may be subject to regulatory approval, particularly if they have the potential to impact the company’s financial position or market perception. A stock split may not be an option if a company faces regulatory restrictions.

It’s essential for a company to carefully consider its options and weigh the pros and cons of a stock split before making a decision.

If a company is unsure, it can consult with financial and legal advisors to help determine the best course of action.