Why do companies issue bonus shares?

Companies issue bonus shares for several strategic reasons:

1. Reward Shareholders: Bonus shares allow companies to share profits with investors without reducing their cash reserves. This is an alternative to paying dividends, as it rewards shareholders without impacting the company's liquidity124.

2. Increase Liquidity: By increasing the number of shares in circulation, bonus issues enhance marketability and trading activity. This makes the stock more attractive and accessible to a broader base of investors, particularly retail investors134.

3. Signal Confidence: Issuing bonus shares can signal that the company is financially healthy and expects sustained growth. This can reassure investors and boost confidence in the company's future prospects124.

4. Enhance Equity Structure: Bonus shares can help balance ownership stakes, which is beneficial during mergers and acquisitions. They also convert retained earnings into share capital, improving the company's financial stability and borrowing capacity13.

5. Tax Efficiency: In some jurisdictions, bonus shares may offer tax advantages over cash dividends, as they are not taxed until sold24.