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The word bonus does a lot of quiet damage in Bhutanese investing conversations. A shareholder hears that a company has declared a bonus and assumes cash is on its way, or that something has been handed over free of charge. Neither is quite right. In company law and accounting, a bonus share is a share issued to existing shareholders at no payment, funded from reserves that already belong to those same shareholders. Nobody gains value on the day it happens; the pie is simply cut into more pieces.
It helps to think about the Royal Securities Exchange of Bhutan, where a listed company with, say, 10 million shares trading around Nu 40 each can announce a one-for-one bonus issue. The number of shares doubles to 20 million and the market price adjusts downward toward Nu 20. The total value of a holding stays roughly the same. What changes is the share count, the share price and, often, the liquidity of the counter.
Where confusion really sets in is the paperwork. A broker in Phuentsholing will field calls asking what is the meaning of bonus share, and whether the shares must be paid for. They do not. The company transfers a portion of its retained earnings or share premium account into paid-up capital and issues the new shares in proportion to existing holdings.
The process is orderly. The board recommends a bonus issue, shareholders approve it at a general meeting, and the company files the necessary documents with the regulator. A record date is fixed. Anyone holding shares on that date receives the new shares, usually credited to their demat account within a few weeks. No application form, no payment, no allotment letter to chase.
The common mistake is buying shares just before the record date in the belief that the bonus is a windfall. It is not. The exchange adjusts the reference price on the ex-bonus date, so a buyer pays the pre-bonus price and receives shares worth the post-bonus price. The arithmetic evens out.
Small investors also forget the tax and record-keeping side. The cost of acquisition of the original shares must be apportioned across the larger holding, which matters later if the shares are sold. Keep the company's bonus announcement and your updated demat statement together. A few minutes of filing saves arguments years later.
The advantages of bonus shares are practical rather than magical. First, they improve liquidity: a share priced at Nu 900 is hard to trade on a small exchange, while the same company at Nu 300 after a one-for-two bonus attracts far more buyers. Second, the lower price makes the counter accessible to younger investors and to those saving in small monthly amounts. Third, the issue signals that the company has built reserves it can convert into capital without borrowing, which the market reads as balance-sheet strength.
There is also a psychological benefit that Bhutanese companies rarely state openly. A growing share count keeps existing shareholders engaged and makes the company's equity look more substantial to lenders and to foreign partners evaluating joint ventures. For a bank or a hydropower company, that can matter when negotiating with outside financiers.
What bonus shares do not do is create wealth. A holder of 1,000 shares does not become richer on the day the bonus is credited. The gain, if any, comes later, from the company's earnings on a larger capital base and from the market's willingness to pay a higher multiple for a more tradeable stock. Anyone promising otherwise is selling something.
A question that comes up in accounting classes at Sherubtse and in small business offices in Thimphu is whether a bonus is a direct or indirect expense. The answer is clean: neither. A bonus issue is not an expense at all. It is a capital transaction, a reclassification within equity from reserves to share capital. No cash leaves the company, so nothing touches the profit and loss account, directly or indirectly.
This is where the bonus calculation formula deserves attention. The most common version is simple: new shares equals existing shares multiplied by the bonus ratio. A one-for-three bonus on 6,000 shares gives 2,000 new shares, taking the holding to 8,000. The adjusted cost per share is the original total cost divided by the new share count. If you paid Nu 300,000 for 6,000 shares at Nu 50 each, the adjusted cost after a one-for-three bonus is Nu 37.50 per share.
Confusing this with a cash dividend is the error to avoid. A cash dividend reduces profit and is an expense in the broader sense of a distribution from earnings. A bonus issue only rearranges the equity section of the balance sheet. Once that distinction is clear, most of the mystery around bonus shares disappears, and the reader can evaluate a company announcement on its merits rather than on the word printed at the top.