When a shareholder receives bonus shares, he gets nothing except additional share certificate. But he is benefited by bonus shares in following ways:

(1) Capital Gain: He has the advantage of making capital gains by selling the additional shares without affecting his original holdings.

The investors' confidence in shares of the company rises, so that original shareholders get ready market for their shares.

(2) Tax Advantage: When a shareholder gets cash dividend, it is liable to income-tax, but no tax is payable when he gets bonus shares. (It must be remembered that in India, dividend has become tax-free in the hands of shareholders. Now no tax is payable by him on dividend income). Due to tax benefit stock dividend has become very popular in the USA.

(3) High Dividends: If the company is able to increase its profit and maintain previous rate of dividend, the shareholder gets higher earnings from dividend. It must be remembered that prudent management would issue bonus shares only when the company's earnings are likely to improve proportionately.

Benefits to Creditors

Creditors are benefited in the sense that cash is retained in the company which would strengthen the liquidity position of the company. This would enable the company to pay interest regularly to creditors. Secondly, the assets of the company increase as cash remains with the firm, which increases the security available to creditors. However, if the company continues to pay the same rate of dividend in future also, more cash will go out, which would impair the safety margin for creditors.