Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

A bonus issue made to shareholders is an example of which type of corporate action?

1. Voluntary

2. Mandatory

3. Optional

4. Discretionary

The correct answer is: Mandatory

A bonus issue, also known as a scrip issue or capitalization issue, represents a corporate action that is classified as mandatory. In this scenario, existing shareholders receive additional shares based on their current holdings, effectively increasing the number of shares they own without the need to invest any additional cash. This type of action is enacted by the company's board of directors and does not require any decision or action on the part of the shareholders, which solidifies its classification as mandatory. This distinction is significant because, in mandatory corporate actions, all affected shareholders automatically participate, whereas, in voluntary or optional actions, shareholders have a choice on whether to participate or not. Discretionary actions can involve a degree of choice or flexibility, but a bonus issue is carried out as a requirement set by the company, making it distinct in its nature. Understanding mandatory corporate actions is crucial for investors, as it influences shareholdings and the overall equity structure of the company without requiring active participation or decision-making from shareholders.