Can a Share with a Face Value of 1 Provide Bonus Shares?

Can a Share with a Face Value of 1 Provide Bonus Shares?

Yes, a share with a face value of 1 can indeed provide bonus shares. Bonus shares are issued by a company to its existing shareholders usually in proportion to their current holdings, a strategy used to reward them and increase their share in the company. This decision is not restricted by the face value of the shares but rather by the company’s retained earnings and the decisions made by its board of directors.

The Mechanism of Issuing Bonus Shares

When a company issues bonus shares, it typically increases the number of shares outstanding while maintaining the overall equity value. For instance, if a company with a face value of 1 declares a bonus of 1:1, shareholders would receive one additional share for each share they own. This effectively doubles the number of shares they hold while the face value remains the same. This action does not change the total equity value of the company, but it does enhance the liquidity of the shares and makes them more accessible to new investors due to the lowered cost.

Understanding the Concept of Face Value and Stock Splits

Although the face value of a share and the issuance of bonus shares are not intrinsically linked, it's worth noting the concept of stock splits. In some markets, like the Indian stock market, the face value of a share is often set at 1 because it cannot go below this level. This restriction can lead to a situation where issuing additional shares to increase liquidity might be the only option. During a bonus issue, the company uses reserves to issue new shares, whereas in a stock split, the reserve remains intact.

How Bonus Shares Affect the Company's Equity and Reserves

When bonus shares are allotted, the equity capital of the firm increases, and a corresponding decrease occurs in the reserve account. For illustration, before a bonus share declaration, the equity capital and reserve values are as follows:

Example before Bonus Share Issue

Equity capital (Face value Rs1) 1,000,000

Reserves 500,000

Assuming a bonus ratio of 1:4, for every 4 shares held, 1 bonus share will be allotted. If the company boasts a total of 100,000 outstanding shares before the bonus announcement, this results in the issuance of 25,000 new shares with a face value of Rs1. This means:

After Bonus Share Issue

Equity capital value will increase to 125,000 (1,000,000 25,000 * 1)

Reserve account will decrease by 25,000 to 25,000 (500,000 - 25,000)

In summary, allocating bonus shares does not affect the face value, but it does impact equity capital and reserve accounts. Shareholders gain an additional number of shares, but the total value of their holdings remains relatively unchanged.