Dividends, Bonus Shares and Retained Earnings in Nepal: A Shareholder's Guide

Some issue bonus shares. Some keep everything. Many do a mix.

Most investors read the announcement, see a percentage and form a judgement: "twenty percent bonus, good" or "only five percent cash, disappointing." That percentage tells you very little. What matters is what the company does with the profit, whether the payout is sustainable, and what the tax and valuation consequences are.

This guide explains how to read those announcements. It is general education based on the law as we understand it, not investment advice, and it does not tell you to buy, hold or sell any share.

What a company can do with its profit

After paying corporate tax, a company has three broad choices:

These can be combined. The important point is that none of them creates value by itself. Value comes from what the company earns on the capital it keeps, or what you earn on the cash you receive.

Cash dividends

A cash dividend is a payment of after-tax profit to shareholders. On a share with a face value of NPR 100, a 10% cash dividend normally means NPR 10 per share.

For a Nepal-resident individual, tax is withheld at 5% on the dividend under Section 88 of the Income Tax Act, 2058. For most individual investors this is the final tax on that income. Companies, institutions and non-residents can be treated differently, so check your own position.

When a dividend makes sense, and when it does not

Cash dividends suit holders who need income. They are also useful evidence: in a market where some profits never turn into cash, a steady dividend history shows real cash generation.

A large dividend is not automatically good news. A company with good growth projects should often keep its profit and put it to work. A simple test: can the company earn a higher return on NPR 100 retained than you could earn by receiving and investing it yourself? If the company earns 20% on equity and you would earn 10% elsewhere, retention is better. If the company earns 6%, a payout is better.

Also look at cash, not only profit. A company that pays a dividend by borrowing, cutting needed investment or running down its cash is not being generous. Check the cash flow statement alongside the income statement, and compare the payout ratio (cash dividends divided by net profit) with the company's growth plans.

Bonus shares

A bonus share gives existing shareholders extra shares at no cost, in proportion to their holding. Under Section 179 of the Companies Act, 2063, a company can issue bonus shares out of the amount available for dividend, by a special resolution of the general meeting, and must inform the Office of the Company Registrar before issuing them.

Your percentage ownership stays the same, because everyone receives shares in proportion. Reserves fall and share capital rises. No new cash comes into the company.

A bonus share is not free money

A bonus issue changes the number of shares, not the value of the business. If a company worth NPR 120 million has 1 million shares and issues a 20% bonus, the share count becomes 1.2 million and the theoretical price falls from NPR 120 to NPR 100.

The formula is: theoretical price after the bonus = price before the bonus divided by (1 + bonus ratio). You own more shares, but each is a smaller slice of the same company.

Real prices can differ from this result. Sentiment, liquidity and expectations all move prices. But those are market reactions, not value created by the bonus. A price that stays well above the theoretical figure is pricing in something else, such as expected earnings growth.

Why companies issue bonus shares

How bonus shares are taxed

Bonus shares are treated as a distribution of profit under the Income Tax Act and taxed with a 5% withholding, the same as a cash dividend (Sushil Parajuli, taxation of bonus shares). That created a practical problem: a shareholder received shares but had to find cash to pay the tax.

What changed in November 2025. The Securities Board of Nepal (SEBON) issued the 10th amendment to the Securities Issuance and Allotment Guidelines, adding sub-section (7) to Section 40. Companies must now arrange for the dividend tax on bonus shares to be adjusted and paid by the company from the dividend itself (Sharesansar). SEBON said it acted because some companies delayed crediting bonus shares on the pretext of unpaid tax, following recommendations of the High-level Commission on Economic Reform (myRepublica). This changes who pays and when. It does not change whether tax is due.

Bonus shares from share premium. Be careful here, because it is a common source of wrong advice. Where a company issued shares at a premium, for example in a further public offering, and later issues bonus shares out of that premium, the Constitutional Bench of the Supreme Court held on 14 December 2023 that this is a distribution of dividend other than out of profits under Section 56(3) of the Income Tax Act, and it is taxable (Nitipartners). In other words, the premium itself is a capital receipt when the company receives it, but a bonus issue paid from it is not tax free. If you rely on this, confirm the current position with the company's registrar or a tax adviser before acting.

Retained earnings

Retained earnings are accumulated profit the company has earned and not distributed. They sit in shareholders' equity on the balance sheet. The simple relationship is:

Closing retained earnings = opening retained earnings + net profit after tax - dividends - other appropriations.

Retained earnings are not necessarily cash. They may be tied up in factories, stock, receivables, loans to related parties or other assets. A company can have large retained earnings and very little cash.

Retention is good when it funds productive growth: capacity for a manufacturer, regulatory capital for a bank, working capital for a trading business. It is a warning sign when management hoards cash, invests poorly, or lends to related parties on poor terms.

How to judge retention

A useful discipline: for each NPR 100 a company keeps, ask what you received in return. If five years later the answer is "nothing visible," the retention was not productive. If earnings per share grew steadily, it did its job.

Comparing the three choices

Do not judge a distribution by its headline percentage. A 30% bonus is not automatically better than a 10% cash dividend, and keeping all the profit is not automatically growth-minded.

Dates and mechanics

For a listed company, track these dates:

Under Section 182 of the Companies Act, 2063, dividend must generally be distributed within 45 days of the decision, unless a law prohibits it, the right to the dividend is disputed, or circumstances beyond the company's control prevent it. If it is late, interest at the prescribed rate is payable. If you have not received a declared dividend in time, follow up with the company's registrar.

Buying shares just to collect an announced distribution gives no free benefit. The price usually already includes the distribution, and falls by roughly its value on the ex-date.

Bonus issues also rarely divide evenly. A holder of 1,005 shares at a 15% bonus is entitled to 150.75 shares. Fractional shares are not issued, and companies treat them differently, so check the company's policy.

Common confusions

A checklist for reading an announcement

The distribution:

Capital allocation:

Your position:

Also read how these choices fit the wider market: the budget made capital gains tax on listed securities final, and the capital market revival plan covers the rules around listed investing.

Frequently asked questions

If you also sell shares rather than only receive dividends, see our answers on capital gains tax on shares and property in Nepal.

How Veritas helps

We advise companies on dividend policy, bonus issues and the tax and compliance rules that go with them, and we help shareholders and promoters understand the tax consequences of a distribution. We do not give investment advice on whether to buy or sell a security. See our tax advisory service, or talk to us.

Sources

*This article is general information, not tax, legal or investment advice. Tax rules and regulatory requirements change, and every shareholder's circumstances differ. Speak to a qualified adviser before acting on anything here.*