What are Bonus Shares?

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Who doesn’t like getting a Diwali or an annual bonus at work? It shows you’re valued and adds to your capital as well. In the context of the stock market, bonus shares are a lot like those delightful surprises. Through this article, we will shed light on the meaning of bonus shares – what they are, how they work, and why they matter in the Indian stock market. 

Investing in the stock market exposes you to a diverse array of financial instruments, with bonus shares often standing out for their unique characteristics. In this blog, we will understand the meaning of bonus shares, the issuing process, the rationale behind their issuance, eligibility criteria, and the manifold benefits they offer to both companies and investors.     

What are Bonus Shares?

Here’s a simple definition of bonus shares: They represent additional shares that a company distributes to its existing shareholders without any additional cost to the investor. They may also be known as scrip dividends or capitalisation issues. This allocation is essentially a gesture by companies to reward their loyal shareholders by increasing their ownership in the company without necessitating any cash outlay.

A Closer Look at the Issuing Process

Before considering bonus share issuance, a company assesses its financial health, ensuring it has accumulated profits or reserves to capitalise on. External factors, such as prevailing market conditions and the industry landscape, influence the decision to issue bonus shares.

The issuance of bonus shares involves a capitalization of the company's reserves or accumulated profits, which are then converted into share capital. Typically, this process requires approval from the company's board and subsequent approval from its shareholders during a general meeting.

Post-shareholder approval, the company notifies the stock exchanges of the decision and the bonus share ratio. Regulatory bodies review the company's compliance with the stipulated norms for bonus share issuance. Thereafter, the company declares a "record date” and an "ex-date" to the market.

What is a Record Date and an Ex-Date?

To be a part of the bonus share issuance process, you must be aware of the "record date," which is the cut-off date set by the company. If you hold the company’s shares before this date, you will be eligible for bonus shares.

The "ex-date" is the day when shares start trading without the bonus benefit. It's the date from which new shareholders won't receive the extra shares.

Additional Considerations

  • Liquidity Impact: Bonus share issuance can impact liquidity in the short term as more shares enter the market. Investors should assess the potential impact on share prices and overall market dynamics.
  • Shareholder Communication: Effective communication from the company regarding the bonus issue is crucial to ensure transparency and clarity for shareholders.
  • Tax Implications: While bonus shares are tax-free at the time of issuance, any subsequent capital gains upon selling these shares may attract taxation.

Benefits of Bonus Shares

For Companies:

  • Enhanced Market Perception: Issuing bonus shares often boosts the company's image in the market. It suggests that the company is doing well and has the financial strength to reward shareholders.
  • Increased Liquidity: Bonus share issues can lead to a rise in the number of outstanding shares, potentially increasing liquidity in the market. More shares available for trading can attract a broader range of investors.
  • Retained Earnings Utilisation: Companies often issue bonus shares from their retained earnings, indicating efficient utilisation of profits. It's a way to distribute profits among shareholders without affecting the company's cash position.

For Investors:

  • No Cash Outflow: Investors receive additional shares without any cash outflow. This can be advantageous for those who prefer accumulating more shares without spending additional money.
  • Enhanced Ownership Stake: Bonus shares increase the total number of shares held by investors, proportionally increasing their ownership stake in the company. It reflects positively on their influence in shareholder decisions.
  • Potential for Capital Gains: While bonus shares don't impact the overall value of the investment at the time of issuance, they can lead to capital gains when the investor decides to sell these additional shares in the future.
  • Dividend Income Potential: With more shares, investors stand to receive higher dividend payouts if the company distributes dividends. This can be an attractive feature for income-oriented investors.

Example

If a company declares a bonus issue in the ratio of 1:1, it signifies one bonus share for every existing share. If you held 100 shares originally, you would receive an additional 100 bonus shares – making a total of 200 shares. Assuming a market price per share of ₹ 150, your initial portfolio would have been worth ₹ 15,000. Post-bonus issuance, the adjusted market price is likely to be around  ₹ 75 per share. When multiplied by 200 shares, the overall value remains the same – ₹ 15,000. However, while the value per share decreases, you now have more shares in the company.        

Wrapping It Up

In conclusion, bonus shares are more than a mere numerical increase in share count. They represent a mutually-beneficial relationship between companies and shareholders. As investors navigate the dynamic landscape of the stock market, a nuanced understanding of instruments like bonus shares becomes an invaluable asset in making informed investment decisions.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only.

For Detailed Disclaimers, click Here: https://bit.ly/3Tcsfuc

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