The Rationale Behind Issuing Bonus Shares for Private Companies in the UK
The bonus issue of shares, also referred to as a scrip issue or capitalisation issue, represents additional shares that a company distributes to its existing shareholders free of charge. This strategy, often employed as a method of capital management, provides a multitude of advantages for private companies in the UK. Let us delve into the merits of the bonus issue of shares for these entities.
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Conservation of Cash Reserves
A bonus issue of shares is an effective way for a company to ‘reward’ its shareholders without reducing its cash reserves. In essence, it is like paying dividends to shareholders, but without the actual outflow of cash. This enables the company to retain its liquidity, which can be used for business operations or future investment opportunities.
Enhancing Company Image
A bonus issue of shares can bolster the company’s image among stakeholders. This strategy can be particularly impactful in tough economic climates where sustaining cash dividends becomes challenging. Although the bonus issue of shares does not contribute to immediate financial gains, the augmentation of shares held by shareholders can induce a sense of increased wealth, fostering investor satisfaction and boosting confidence in the company.
Capitalising Retained Earnings
When a company implements a bonus issue of shares, it effectively transforms its profits or retained earnings into issued share capital, leading to a stronger balance sheet. This reinforced financial standing can provide the company with a competitive edge during negotiations with lenders, suppliers, and prospective investors.
Attracting New Investments
The bonus issue of shares typically stimulates market activity as it lowers the share price, making it more attractive to potential investors. Although the company’s overall value remains unchanged, the perceived affordability could draw in investors who were previously deterred by a higher share price.
Fostering Long-Term Investor Relations
A bonus issue of shares incentivise shareholders to maintain their investment in the company for the long term. They are tangible rewards acknowledging the loyalty and commitment of shareholders, cultivating a sense of ownership. The possibility of receiving future bonus issue of shares could discourage shareholders from selling their holdings, thereby contributing to share price stability.
Offering Tax Benefits
From a taxation standpoint, a bonus issue of shares can present a more efficient mode of rewarding shareholders in contrast to cash dividends. In the UK, a bonus issue of shares is not subject to Income Tax or Capital Gains Tax when issued. Consequently, shareholders can augment their holdings without incurring immediate tax obligations.
Enhancing Share Liquidity
The bonus issue of shares increases the total number of shares in circulation, improving share liquidity. This benefit can be especially significant for private companies, as their shares are often less liquid than those of public companies. Improved liquidity can facilitate trading of shares and allow the company’s value to be more accurately reflected in its share price.
