An issue of shares to existing shareholders made possible by the capitalization of reserves. No payment is necessary, so it is often called a bonus issue. In cases where one new share was issued for every two previously held, the shareholder would be receiving an acknowledgement that his capital had increased by 50 per cent. However, if the old rate of dividend were not maintained, the share prices would be depressed and the shareholder might not find himself financially better off. If the dividend were maintained, he would have received something that he could sell. It may be good policy to capitalize profits rather than distribute them in the form of dividends, but unless profits are increasing, it will not be possible to maintain dividend rates on an expanding capital.
|Reference: The Penguin Business Dictionary, 3rd edt.|