Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What type of corporate action is a bonus issue?

1. Voluntary

2. Mandatory

3. Discretionary

4. Convertive

The correct answer is: Mandatory

A bonus issue, also known as a scrip issue or capitalization issue, is classified as a mandatory corporate action. This is because it occurs without the choice of shareholders; they automatically receive additional shares based on their existing holdings. The company uses retained earnings or reserves to issue new shares to current shareholders, which increases the total number of shares in circulation but does not change the overall equity value of the company or the proportionate ownership. In contrast, voluntary corporate actions require shareholders to make a choice regarding their investment, such as participating in a rights issue or choosing between different types of dividend payments. Discretionary actions refer to those where the company's board has the discretion to initiate them, while convertive actions involve changing one type of security into another, such as converting preference shares into equity. Therefore, recognizing that a bonus issue automatically affects all shareholders without the need for their consent solidifies its classification as a mandatory corporate action.