What is a bonus issue of shares?

A bonus issue of shares, often referred to as a scrip issue or capitalization issue, involves the issuing of additional shares to existing shareholders at no cost. This is typically done by converting reserves, such as retained earnings, into issued share capital. By doing so, the company does not require any cash payment from the shareholders, but merely rewards them with additional equity.

This method allows shareholders to increase their holdings in the company without any out-of-pocket expenses, effectively increasing the number of shares they own while the overall value of their investment remains proportional. Additionally, it can enhance the liquidity of the shares by increasing the volume of shares available in the market, which can be beneficial for both the company and its shareholders.

Other options do not correctly define a bonus issue: Issuing shares at a premium based on market value involves selling new shares for cash above their nominal value and does not involve using reserves. Offering new shares to the public to raise capital pertains to a public offering rather than a bonus issue. Finally, any issuance of shares that requires payment from shareholders would not be classified as a bonus issue, as that is fundamentally different from providing free additional shares to current shareholders.