What is bonus issue? (什么是红股?)
We often see that some companies are proposing bonus issue, but what exactly are those? We will see companies that propose bonus issue often write their announcement like this, “the company is proposing bonus issue that provide 1 share for every 2 shares”. Does that mean we will get one share for free for every two shares we owned? The rest of the article will answer this question.
First, we will need to understand why can a company issue bonus shares? There was a rule before September 2020 stating that the retained earnings of the company must be sufficient, in order to issue bonus shares. For example, a company must have at least the same amount of retained earnings with amount of share capital, to issue a 1:1 bonus share. However, this rule was amended in September and now every company has the right to issue bonus shares without having their retained earnings being higher than their share capital, hence why we are seeing companies proposing 1-for-3 or even 1-for-4 bonus issues recently.
So why some companies would like to propose bonus issue? This is to increase the number of shares and brings down the share price, allowing more investors to buy their shares. Since the share price will be adjusted after bonus issue, their price will be more attractive, hence fellow investors will be able to push up the share price again.
Back to the question, do we really get the shares for free if a company that we are currently holding propose bonus issue? The answer is a no, we will only get extra amount of shares, but the price will also be adjusted. Let say initially you owned 1000 shares of Company A at RM1.00, and the company proposed a 1:1 bonus issue, then your holding after the bonus shares entitlement will change to 2000 shares of RM0.50, where the total amount will remain unchanged. The following diagram will show a clearer illustration of this.
In short, bonus issue does not grant the investors free shares, but is to merely increasing the number of shares and reduce the share price. This is to make sure the company’s share price is more affordable and “seemly” more attractive to fellow investors.
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