When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.
The advantages of issuing Bonus Shares are as follows:-
- Fund flow is not affected adversely.
- Market value of the company's shares come down to their nominal value by issue of number of shares.
- Market of the member's shareholdings increases with the increase in number of shares in the company.
- 'Bonus Shares' is not an income. Hence, it is not a taxable income.
- Paid-up share capital increases with the issue of bonus share.
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