The bonus issue of shares, a process where additional shares are distributed to existing shareholders at no extra cost, presents a strategic financial manoeuvre for private companies. This mechanism converts a company’s profit reserves into share capital without affecting its cash resources. For UK-based private firms, several compelling reasons underline the attractiveness of bonus issue of shares.
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Retaining Cash Resources
The primary advantage of bonus issue of shares is that it allows companies to reward their shareholders without affecting their cash reserves. These reserves can then be utilised for various business operations or future investment opportunities, offering greater financial flexibility to the company.
Enhancing Shareholder Confidence
The act of bonus issue of shares often projects a positive image of the company’s financial health. It signifies that the company has sufficient profits earmarked for distribution, which can boost shareholder confidence. While these shares don’t directly translate into monetary gains for shareholders, the perceived increase in share ownership can boost investor morale and confidence.
Capitalising Reserves
Bonus shares transform a company’s accumulated profits into share capital. This conversion results in a stronger balance sheet due to increased share capital and reduced profit reserves. A fortified balance sheet can improve the company’s standing when negotiating terms with potential investors, creditors, or even suppliers.
Attracting New Investors
The bonus issue of shares increases the number of shares in circulation, reducing the overall share price without affecting the total market capitalisation. This price reduction can make the company’s shares more accessible to potential investors who may have previously found the share price to be a barrier.
Promoting Long-Term Investment
The bonus issue of shares serves as a reward to shareholders, incentivising them to retain their investment in the company. By creating an expectation of future bonus issue of shares, companies can encourage shareholders to hold onto their shares for longer periods. This long-term holding can contribute to market stability and reduce share price volatility.
Offering Tax Benefits
From a taxation perspective, the bonus issue of shares can provide more efficient returns to shareholders than cash dividends. In the UK, these shares are not subjected to Income Tax or Capital Gains Tax at the point of distribution. Therefore, shareholders can enlarge their shareholdings without incurring immediate tax liabilities.
Increasing Market Liquidity
The bonus issue of shares raises the total number of shares in the market, which can enhance market liquidity. This is particularly beneficial for private companies, where shares are typically less liquid compared to public companies. Enhanced liquidity can ease share trading and provide a more accurate representation of the company’s market value through its share price.