Deciphering Corporate Actions: Bonus Share Issue

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What is a Bonus Share Issue?

 

A Bonus Share is also known as Scrip Issue or Capitalisation Issue. Existing shareholders of the company gets free additional shares at no cost in direct proportion to the existing shares that they hold. 

For example, if there is a Bonus Offer of 1 for 10, it means that the existing shareholders will receive 1 new share, for every 10 existing shares that they have.

Bonus Share issue will result in an increase of outstanding shares in the market. However, it does not cause any dilution in the shareholders' ownership in the company.

The bonus shares are accorded from the company's share price premium or retained earnings. Retained earnings are the net profits accumulated over the years and are not paid out in dividends to shareholders.

The conversion of retained earnings to paid-up share capital (Bonus Shares) is known as capitalisation of reserves. During the capitalisation of reserves, there will be corresponding increase in shareholders' equity and decrease in retained earnings.

 

*Important Note* No new funds are raised in this corporate action.
Shareholders are issued bonus shares for FREE.

 

Companies undertake Bonus Issues for the following reasons:

  • Reward existing shareholders in shares instead of dividends, to preserve cash flow for business operations or expansions.

  • Increase trading activity in the stock due to the decrease in company's share price, making it more affordable to retail investors.  

    Refer to the examples below if you are wondering why there is a decrease in company's share price.


  • A strong indicator of the company's financial strength to maintain a larger share equity base and positive future growth prospects.

    This enhances the company's credit standing with financial institutions, and hence increases their borrowing capacity.

 

How does it work?

 

The flow of the corporate action goes like this:

  1. The company announces a share consolidation or share split and the reasons for the corporate action. 

  2. The key important dates and timings will be announced. If you need to understand key terms such as last cum date, ex-date and record date, refer to this post

Last Cum Date: refers to the last day where you will be entitled to the corporate action. It is one day before the Ex-date. 


Ex-date: refers to the date the corporate action is carried out. 


Record Date: It is the date set by the company to determine who is entitled to the corporate action in their "books". 

 

 

How do you calculate the Theoretical Price after Bonus Share Issue?

 

 

 

Example 1

 

 

UMS Holdings has announced a Bonus Issue with the following details:

Share Price on 23rd Oct 2017 at closing (retrieved from past records): $1.065

Ex- Date: 24th Oct 2017

Record Date: 26th Oct 2017

Corporate Action: Bonus Offer of 1 for 4.

This means that shareholders will receive 1 bonus share for every 4 existing shares held.

 

On 24th Oct 2017,  the calculations for the theoretical share price on opening is as follows:

 

 

On the Record Date 26th Oct 2017, the number of shares outstanding in the market will increase while the retained earnings will decrease. However, there will be no change in the value of the company.

On 24th Oct 2017, if the share price maintains above $0.852, the shareholders will have a capital gain.

If the share prices falls below $0.852, the shareholders will have a capital loss.

 

Example 2

 

 

Oxley Holdings has announced a Bonus Issue with the following details:

Share Price on 22nd Feb 2018 at closing (retrieved from past records): $0.675

Ex- Date: 23rd Feb 2018

Record Date: 27th Feb 2018

Corporate Action: Bonus Offer of 1 for 5.

This means that shareholders will receive 1 bonus share for every 5 existing shares held.

 

On 23rd Feb 2018,  the calculations for the theoretical share price on opening is as follows:

 

 

On Ex-Date 23rd Feb 2018, if the share price maintains above $0.5625, the shareholders will have a capital gain.

If the share prices falls below $0.5625, the shareholders will have a capital loss.

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