The bonus issue of shares represents a strategic move made by companies to distribute additional shares to existing shareholders at no cost. For private companies in the UK, the bonus issue of shares can offer an array of compelling advantages, such as conserving cash resources, enhancing investor relations, and boosting the company’s financial profile. Let’s discuss the rationale behind why the bonus issue of shares can be an attractive proposition for UK-based private companies.
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Conservation of Cash Resources
By opting for the bonus issue of shares, companies can effectively reward shareholders without depleting their cash reserves. This method is akin to distributing dividends, but circumvents the immediate financial outlay. As such, the company is better placed to preserve liquidity, ensuring the availability of cash for operational necessities and potential growth opportunities.
Enhancement of Investor Relations
The bonus issue of shares can bolster the perception of a company among its stakeholders. In an economically uncertain climate where cash dividends might be less viable, bonus issue of shares serve as an effective substitute. While the monetary value isn’t immediately realised, the psychological effect of owning more shares can enhance investor sentiment and foster long-term loyalty.
Conversion of Reserves into Capital
The bonus issue of shares essentially transforms a company’s retained earnings or reserves into share capital. This shift fortifies the balance sheet by increasing the equity component, which can be a powerful negotiating tool when interacting with lenders, vendors, or potential investors.
Broadening Investor Base
A bonus issue of shares can lead to heightened market activity due to the reduced share price following the distribution. Although the overall market capitalisation of the company remains constant, the lower share price could attract new investors who previously perceived the cost as a barrier to entry.
Incentivisation of Long-Term Holdings
By rewarding shareholders with a bonus issue of shares, companies can encourage them to retain their holdings over an extended period. This action engenders a feeling of acknowledgement and ownership, reinforcing shareholders’ commitment to the company. The prospect of future bonus issue of shares can deter shareholders from offloading their shares, thereby reducing share price volatility.
From a tax standpoint, the bonus issue of shares in the UK offers significant benefits. Bonus shares aren’t subject to Income Tax or Capital Gains Tax at the time of issuance. This allows shareholders to augment their stake in the company without incurring immediate tax liabilities, a boon when compared to the taxable nature of cash dividends.
Enhancing Share Liquidity
Bonus issue of shares increases the number of shares available in the market, thereby improving liquidity. This improvement can be particularly beneficial for private companies, where shares are often less liquid than their public counterparts. Greater liquidity facilitates share transactions and allows for a more accurate reflection of the company’s value through its share price.