Posted at 10.16.2018
The term benefit issue also called as stock dividend means an extra dividend paid to shareholders in a corporation from additional income. When large account gets accumulated out of revenue of your company much beyond its goals and needs, the business's directors should share out an integral part of it on the list of existent shareholders of company in the form of bonus. Benefit can be paid in two varieties either in cash or in form of stocks. The company will pay cash bonus when it profits massive amount revenue as well as cash to pay dividend. But many a times, it happens a company is not in a position to pay bonus offer in cash though it has enough levels of income because of poor cash position or due to its unfavorable effects on the working capital of the company. In such a situation, the company pays a bonus to its shareholders by means of shares; a free of charge share thus granted is actually a bonus show.
A bonus talk about is a free of charge show of stock given to current/existing shareholders in an organization, based upon the amount of stocks that the shareholder already possesses at the time of announcement of the reward. The key point here's, that the issue of bonus shares only increases the final number of shares released and owned, but it can affect the value of the company by any means.
Certain classes of stocks only are allowed to extra issues and it will depend on the constitutional documents of reputable company.
Bonus show is free share in fixed proportion to the shareholders. For example ABC ltd. issues reward talk about in 1:1 percentage where the dividend is 20% and Rs. 10. 00 as face value dividend/talk about this means that the business will be supplying Rs. 2 of dividend per share and with reward share it runs dual i. e. Rs. 4 as you free talk about is given to shareholder based upon the number of shares he/she already has.
Sometimes an organization may change the amount of shares in concern by capitalizing its reserve. Quite simply, it can convert the right of the shareholders because every individual will hold the same percentage of the excellent stocks as before. Main reason for issuance is the price tag on the existing show is becoming unwieldy.
Conservation of Cash:
In issuing bonus shares, cash outflow is not very involved. The business can retain earnings as well as meet the desire of the shareholders to get dividend.
Keeps the EPS at an acceptable level:
Company may face problems having high earning per show both from employees and consumers. Employees may feel that they are really underpaid. While consumers may feel that they can be being charged too much for the company's products.
Issue of benefit shares increases the number of shares and reduces the earning per share.
Increases the marketability of company's stocks:
Issue of benefit shares reduces the market price per share.
Enhances prestige of the business:
By issuing benefit shares, the business increases its credit standing and its borrowing capacity. It shows financial power of the business.
It assists with financing its tasks:
By issuing bonus shares, the extension and other tasks of your company can be easily financed. The company need not be based upon outside firms for money.
When a shareholder obtains dividend in cash, it adds to his total income which is taxed at standard tax rates.
Indication of higher future income:
Issue of extra shares is generally a sign of higher future gains.
Increase in future dividend:
The shareholder will get more dividends in the future even if the company continues to offer existing cash dividend per show.
High psychological value:
Issue of benefit stocks is usually perceived positively by the marketplace.
After the issue of the bonus stocks the shareholders' expectation of increment in the existing rate of dividend per show carries on. It becomes really a challenging job for the company to retain the existing rate of dividend per show.
Issue of reward shares helps prevent new traders from becoming the shareholders of the business.
Some shareholders may like cash dividend to stock dividend, such shareholders may feel disappointed (without doubt they can very well sell their extra shares and get their money).
Before 1997 in India, dividends were taxed in hands of the shareholders. They used to reveal the dividend income under the head 'Income from Other Options' and then used to pay tax on dividend at a level that depended on their individual duty bracket.
After 1997, Administration of India released the dividend circulation tax, regarding to which, when company announces dividends, it also will pay the dividend distribution tax right to the federal government of India. Therefore, shareholders don't need to pay any duty they get.
The Finance Function, 1997 released the dividend circulation tax for the very first time in India and under this technique, companies used to pay dividend distribution tax directly at the pace of 10%. Here, this function benefited to people shareholders who dropped in the bigger than 10% taxes bracket.
The 2002-03 Budget reverted back to the sooner system for just one time where dividends were again taxed in hands of shareholders. However, the 2003-04 Budget reintroduced the dividend distribution duty rate in India but at an increased rate of 12. 5% plus surcharges. And the effective dividend distribution tax rate in India is 16. 609%.