Bonus issue
Free shares issued to existing shareholders out of retained earnings. Increases your share count without you paying anything; share price adjusts down proportionally.
A bonus issue is a way for a company to reward its shareholders without actually costing them any money. Think about it like this: If you have a 500-piece jigsaw puzzle, and the company gives you 100 more pieces without you having to buy them, you now have a 600-piece puzzle. The pieces are already there, they just weren’t with you before. Similarly, when a company decides to issue a bonus issue, they are giving you more shares based on the number of shares you already own. For instance, if you own 1,000 shares in a company and they declare a 1-for-1 bonus issue, you will now own 2,000 shares.
In the Nigerian context, companies listed on the Nigerian Exchange (NGX) sometimes opt for bonus issues as a way to increase the liquidity of their shares. For example, if a company like MTN Nigeria has a 1-for-10 bonus issue, an investor who owns 500 shares will end up with 550 shares. This doesn't mean the company has suddenly made more money; it's just redistributing its existing equity. The market price of the shares usually adjusts downwards so that the overall value remains the same. If a share was trading at ₦100 before the bonus issue, it might come down to ₦90.91 after the issue, reflecting the proportional increase in the number of shares.
It's important to note that while a bonus issue doesn't require you to invest more money, it does affect your tax obligations. For instance, if dividends are paid out on the new shares, you might have to pay a 10% Withholding Tax (WHT) on those dividends. Similarly, if you decide to sell your shares later and make a profit, you will be liable for a 10% Capital Gains Tax (CGT) on the profit. The Central Bank of Nigeria (CBN) also plays a role, as the Monetary Policy Rate (MPR) can influence the attractiveness of holding shares versus other investments like Treasury bills.
Understanding bonus issues can help you make more informed decisions about your investments. Knowing that a bonus issue doesn't inherently increase the value of your investment portfolio can prevent you from making impulsive decisions based on a superficial increase in the number of shares you own.
Why it matters: Knowing about bonus issues helps you understand how companies distribute their equity and how it impacts your share value and tax obligations. It ensures you are not misled by the apparent increase in the number of shares you hold, and instead focus on the real value and financial health of the company.