When it comes to financial strategies for growing businesses, issuing bonus shares is an attractive option for private companies in the UK. Bonus shares, also known as scrip or capitalisation issues, are additional shares distributed to existing shareholders free of charge, in proportion to their current shareholding. The action increases the total number of shares without extracting funds from the company’s reserves. Here’s why this strategy can be beneficial for private companies.
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Enhancing Market Perception
Bonus shares issuance enhances the perception of the company in the eyes of investors and potential business partners. Even though the value of the company remains the same, the increased number of shares makes the company seem larger and more established, potentially attracting further investment and business opportunities.
Increasing Share Liquidity
By increasing the number of shares in circulation, bonus share issuance enhances share liquidity. Greater liquidity can be attractive to investors as it facilitates easier buying and selling of shares without significantly impacting their price. This, in turn, can contribute to improved company valuation and a heightened interest from investors.
Rewarding and Retaining Shareholders
Issuing bonus shares acts as a reward to loyal shareholders by increasing the number of shares they hold at no additional cost. This strategy can help to enhance shareholder goodwill and loyalty, thereby contributing to longer-term investment and support for the company.
Capitalising on Retained Earnings
Rather than letting surplus profits sit idle in the company’s reserves, issuing bonus shares allows the company to convert these retained earnings into capital. This strategy helps strengthen the company’s financial base without impairing its cash flow or reserves.
Mitigating Market Price Stabilisation
Bonus shares can bring about a stabilising effect on the market price of shares. Following the bonus issue, the per-share price will decrease, making the shares more affordable for potential and existing investors. Although the total market capitalisation remains the same, the lower share price can attract more investors, thereby boosting demand and stabilising the price.
Facilitating Future Financing
Once a private company has successfully executed a bonus issue and increased its capital base, it could be in a better position to raise funds in the future. This is because a larger capital base can increase the company’s borrowing capacity, enabling it to secure debt financing more easily. It can also make the company more attractive for equity financing due to increased investor interest.