(c) A bonus issue of shares, sometimes referred to as a scrip issue or more accurately a capitalisation issue is similar to a rights issue in that existing members receive new shares in proportion to their existing holdings, but it differs in one essential point: the individuals who receive the new shares usually do not have to pay anything for them; they are received free. However, as already pointed out in (b) above, it is a strict rule of company law that shares must be paid for and cannot be issued at a discount. This apparent anomaly is explained by the fact that the shares are paid for, but they are paid for by the company itself, rather than the members. It is perfectly possible for the company to issue partly paid-up bonus shares, in which case the recipients may have to make some contribution in the future.
In effect what the issue of bonus shares amounts to is a capitalisation of the company’s reserves, some of which could have been distributed to the members in some other way such as dividends. This is not the case with all reserves as some nondistributable ones, such as the share premium account and the capital redemption reserve may be used to fund the bonus issue. Bonus issues must never be funded from a company’s ordinary capital. |
