Bonus (capitalisation) issue 8 / 14

Increase Share Capital

A company may wish to increase its share capital without needing to raise additional finance.

A bonus issue raises no funds.

A company can make a bonus issue to re-classify some of its reserves as share capital.

Any reserve may be re-classified in this way, including a share premium account or other reserve.

Therefore, these reserves will be debited and share capital credited.

Such a re-classification increases the capital base of the company and gives greater protection to the company’s creditors.

Advantage

  • Increases share capital without reducing present shareholders' holdings

  • Capitalises reserves, therefore less is available for distribution as dividends

Disadvantages

  • Does not increases cash

  • If profits fall, the payment of dividends could be jeopardised