Both share dividend and bonus issue involve issuing new shares to shareholders. Here I will summarize the differences between these two corporate actions.
Comparison between share dividend and bonus issue
| Share dividend | Bonus Issue | |
| Purpose | Reward shareholders | Increase liquidity |
| Source of issuance | Treasury shares | 1. Retained earning or, 2. Subdivision of shares |
| Share price adjustment | Yes (minor) | Yes (major) |
| Ratio of new shares issued | Typically <5% | Typically > 25% |
| Tax | No | No |
Share dividend
Dividend is share of profit with shareholders, this is true whether the dividend is issued as cash or shares.
For companies having sufficient cash on hand, company can purchase shares from open market and keep as treasury shares. Theoretically, purchase of shares from open market only makes sense when the share is deemed trading below its value. At later stage, company can reissue these treasury shares to shareholder as share dividend. This essentially means company is buying shares from others and give to existing shareholders as reward.
Just like cash dividend normally is given as single digit percentage of share price, same goes for share dividend. Ratio of share dividend issued to existing shares is often with range of 5% or less.
Bonus issue
Different from share dividend, rather than rewarding shareholders, the main purpose of bonus issue is to make share price more “affordable” therefore improving liquidity of the stock.
Often, there is a “sweet spot” of share price that can bring transaction volume of a stock to an optimum level. If the share price is too low, it might attract too much of speculation activities. On the other hand, if share price is too high, it would discourage buying interest especially from retail investors.
Although bonus issue does not bring monetary value directly, investors always treat bonus issue as a good news. This is because it is generally deemed that company will perform bonus issue only when management thinks that there is not enough transaction volume to reflect value of a stock on its share price.
Because purpose of bonus issue is to increase liquidity, the ratio of new shares issued relative to existing shares in circulation is always much more than share dividend, in the range of 25% or above.
Bonus shares can be issued with or without capitalization.
1. Capitalization from retained earning
Retained earning is accumulated net income of a company after dividend payout to shareholders. If bonus shares are issued from retained earning, that means in equity account, the corresponding portion of retained earning will be moved to share capital.
Note that retained earning is profit made by company, therefore it is distributable. On the other hand, share capital is deemed as money invested by shareholders therefore is non-distributable. Once the retained earning portion is moved to share capital due to issuance of bonus shares, the corresponding portion cannot be used as distribution of shareholders in future.
2. Without capitalization
Before talking about bonus issue without capitalization, here is a bit of background story. Under the superseded Companies Act 1965, cash consideration must be paid or transferred in connection with issuance of new shares. Such requirement is no longer applicable with Companies Act 2016 which came into effect in 2017. Companies Act 2016 can be accessed through Companies Commission of Malaysia website here.
In other words, with the old companies act, bonus issue might be done through capitalization. But now, it is possible to issue bonus shares without capitalization through share subdivision. Bonus issue performed in this regard actually has no difference with stock split (i.e. simply split existing shares into multiple shares to lower share price). In equity statement, there is no moving of capital.