Advantages of Bonus Shares

To

shareholders:

Tax

benefit
Indication of higher future profits
Future dividends may increase
Psychological value
To

company:

Conservation

of cash
Only means to pay dividend under financial difficulty and contractual restrictions
More attractive share price

Limitations of Bonus Shares

Shareholders wealth
Costly

remains unaffected

to administer
Problem of adjusting EPS and P/E ratio

Conditions for the Issue of Bonus Shares

Residual

reserve criterion

Profitability

criterion

Share split

A share

split is a method to increase the number of

outstanding shares through a proportional reduction in the par
value of the share. A share split affects only the par value and
the number of outstanding shares; the shareholders total
funds remain unaltered.

Example
The following is the capital structure of Walchand Sons & Company:

Walchand Company split their shares two-for-one. The capitalization of the

company after the split is as follows:

Bonus Share vs. Share Split

The bonus issue and the share split are similar except for the difference in

their accounting treatment.

In the case of bonus shares, the balance of the reserves and surpluses

account decreases due to a transfer to the paid-up capital and the share
premium accounts. The par value per share remains unaffected.
With a share split, the balance of the equity accounts does not change, but

the par value per share changes.

Reasons for Share Split

To

make trading in shares attractive

To

signal the possibility of higher profits in the future

To

give higher dividends to shareholders

BUYBACK OF SHARES
The buyback of shares is the repurchase of its own shares by
a company.
As a result of the Companies Act (Amendment) 1999, a
company in India can now buyback its own shares.

In India the following conditions apply in case of the

buyback shares:

A company buying back its shares will not issue fresh capital, except
bonus issue, for the next 12 months.
The company will state the amount to be used for the buyback of shares and

seek prior approval of shareholders.

The buyback of shares can be affected only by utilizing the free reserves,

viz., reserves not specifically earmarked for some purpose.

The company will not borrow funds to buyback shares.
The shares bought under the buyback schemes will be extinguished and they

cannot be reissued.

Methods of Shares Buyback

First, a company can buy its shares through authorized brokers on the

open market.
Second, the company can make a tender offer, which will specify the

purchase price, the total amount and the period within which shares will be
bought back.

Effects of the Shares Buyback

It

is believed that the buyback will be financially beneficial for the

company, the buying shareholders and the remaining shareholders.
Increase in

capital.

the companys debt-equity ratio due to reduced equity

Advantages of the Buyback

Return of surplus cash to shareholders
Increase in the share value
Increase in the temporarily undervalued share price
Achieving the target capital structure
Consolidating control
Tax savings by companies
Protection against hostile takeovers