What are the disadvantages of issuing Bonus Shares?

Banking & FinanceFinance ManagementGrowth & Empowerment

Although there are some distinct advantages of issuing bonus shares, it has some of its demerits too.

Bonus Shares Do Not Increase the Wealth of Shareholders

The issuance of bonus shares does not increase the wealth of shareholders as the shareholders may assume. It only makes the distribution of wealth more widespread. The total value of the wealth of shareholders after the issue of bonus shares remains the same.

Although a potential increase in share price in the market due to favorable psychological effects is imminent in most cases of the issue of bonus shares, it does not directly increase the value of shares by any means. Therefore, it is wrong to assume that when bonus shares are issued, the wealth of shareholders increases proportionately to the holding pattern of shares by the shareholders.

Issuance of Bonus Shares is Costly to Administer

The issue of newer shares is also costly to administer in several ways. For example, when a company issues bonus shares, they must send the shares to thousands of shareholders located even in the most distant parts of the world. This, along with printing and administering costs would increase the costs of maintaining the issue of bonus shares significantly.

Bonus Shares Make Sense Only for Large Issuances

The issue of new shares is also disadvantageous when the issuance is made in smaller units. It increases the variable costs. For example, when the smaller units of bonus shares are issued, the cost of administering the shares may be comparatively too high. Therefore, even if it is confusing, the issuance of bonus shares makes sense only when a large number of shares is issued as bonus shares.

Accounting Related Issues

There are disadvantages of issuance of bonus shares in terms of accounting too. Analysts do not adjust small increases in bonuses to adjusted EPS. They only adjust when the earnings are significant. This makes the issuance of bonus shares a matter of only a formality. This results in a lack of earnings per share.

The ignorance of analysts in realizing small increase in issuance of bonus shares leads to erroneous results in the overall value of shares. Thus, the shareholders with a large number of shares are denied the increase in the value of shares.

Conclusion

Although the issue of bonus shares has some benefits for both the shareholders and the company issuing them, the process brings with it a set of its own issues and challenges. Companies usually weigh the pros and cons of issuing the bonus shares before the issuance. That is why the company management tends to issue bonus shares when it is absolutely unavoidable so that the company and its shareholders may remain in a satisfactory and advantageous position in terms of earnings and profitability.

raja
Updated on 25-Mar-2022 05:43:17

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