Companies issue bonus share to its shareholders when it makes enough profit but it has little in cash to pay cash as dividend ,so they issue bonus share free in exchange of dividend instead of cash .
The requirements to issue bonus share
01. The article s of the company must permit the issue of bonus share
02. Its authorized capital must sufficient to cover the same.
03. The share must be allotted by a board resolution in the proportion determined by share holders in general meeting.
04. The return of allotment must be submitted RJSC within 60 days after allotment.
Bonus shares are issued according to each shareholder’s stake in the company. For example, a three-for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).
Bonus shares are not taxable. But the stockholder may have to pay capital gains tax, if she sells them.
Stock Splits and Bonus Shares
Stock splits and bonus shares have many similarities and differences. When a company declares a stock split, the number of shares increases, but the investment value remains the same. Companies typically declare a stock split as a method of infusing additional liquidity into shares, increasing the number of shares trading and making shares more affordable to retail investors.