A ‘bonus issue’ of shares is also known as a ‘capitalisation issue’ or ‘scrip
issue’.
A company may decide to convert some of its reserves into share capital by issuing fully paid shares to existing shareholders on a pro rata basis for no consideration; in other words, shareholders do not have to pay for the bonus shares. ‘Pro rata’ means that the proportion of shares held by each shareholder pre- and post-bonus issue will not change, and therefore the proportions of voting rights will also remain the same.
Shares that are issued pro rata are often expressed by way of a ratio, i.e. x:y, where x is the amount of shares issued to the shareholder for every amount of shares (y) they currently hold.
This process does not raise any money for the company, but rather the company will use its reserves to fund the issue. A company may use its retained earnings or its share premium account to fund a bonus issue (s.610(3) CA 2006).
The assets and liabilities of the company are unchanged after the bonus issue.