Bonus shares are a sham

Bonus shares are a ‘sham’, according to a top corporate lawyer in a statement that came in the backdrop of a lot of confusion amongst stockbrokers and other stakeholders about bonus share issues.

“Bonus share issues are a sham, because a bonus share does not give a shareholder anything of value,” Aritha Wikramanayake, Senior Partner, Nithya Partners told The Sunday Times Business Club on Monday.

Stock analysts say bonus issues will be less lucrative to companies since the capitalisation of reserves equivalent to the market value of the share is essential.

Some companies also believe bonus issues will not be possible in the future. “Bonus issues are impossible in the future because of the fair value,” JKH Chairman Susantha Ratnayake said.

Wikramanayake explained that a shareholder gets a free share which does not benefit the company. “The price of the free share needs to be proportionately diluted in the company's reserves, but it is not done.” He said it is attractive to the shareholders because it is free, but for an instance, if the company capitalises the reserves at par value when the share price is Rs.100, it is not fair and reasonable to the company, because the company does not get anything out of a bonus issue.

“There is no connection to what the company does to its free share,” he said.

He went on to say that the Act identifies capital as “stated capital”, which is the ‘total of all amounts received by the company or due and payable to the company in respect of issue of shares and in respect of calls on shares’. “This eliminates the authorised share capital, issued share capital and share premium, while stated capital will take precedence,” he said, adding that now the shares have no par value but they have a basis value at which the share is issued to the market which must be fair and reasonable.