It means the conversion of reserve of any type – capital or revenue – into share capital. The typical methods are issue of fully paid bonus shares and conversion of partly paid shares into fully paid shares by utilizing reserves.  The shareholders can gain from the capitalization of reserves only if the rate of dividends is not proportionately reduced. Capitalization of reserves is generally resorted to by a company which has built up substantial reserves. It would enable the company to bring the rate of dividend down but to a reasonable level which looks realistic. The company can also escape from undue charges of profiteering because of large amounts of accumulated reserves.

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