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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

Which of the following best describes a bonus issue of shares for an existing shareholder?

A bonus issue is the free allotment of additional shares to existing shareholders in a fixed ratio, funded by capitalising reserves. Shareholders pay nothing, unlike a rights issue, and the market price adjusts downward after the record date.

  1. AShares issued free to existing shareholders in a ratio, capitalising reservesCorrect
  2. BShares offered to existing shareholders at a discount, requiring payment
  3. CRepurchase of shares by the company from shareholders
  4. DDivision of the face value of each share into smaller parts

Explanation

A bonus issue gives additional shares free of cost to existing holders in a stated ratio by capitalising free reserves. A rights issue needs payment, a buyback is a repurchase, and a split reduces face value without capitalising reserves.

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