Bonus shares are issued to existing shareholders at zero cost primarily to do what?

• A. To raise additional funds for the company
• B. To reclassify non-share reserves into distributable reserves
• C. To reduce share capital
• D. To increase cash from investors

Answer: (B)

A bonus issue is a capitalization of profits or reserves, where the company issues additional shares to existing shareholders at no cash cost by moving amounts from reserves into share capital. The key effect on the balance sheet is a reclassification within equity: non-share reserves are converted into share capital (often described as turning reserves into capital that is then available to support future distributable capacity). Since no new funds flow into the company, there is no cash raised, and the issue cannot reduce share capital or increase cash from investors.

So the primary purpose is to reclassify reserves that are not yet part of share capital into the form of issued capital, effectively reorganizing the equity structure without raising funds. For example, using retained earnings (a distributable reserve) or other reserves to issue new shares increases share capital and reduces those reserves accordingly. This aligns with choosing the option that describes reclassifying non-share reserves into distributable reserves.