March 25, 2025
4 mins read
Interim dividends are payments companies make before the financial year ends. Shareholders receive a part of the profits earlier instead of waiting for the final dividend. Companies usually declare these dividends after reviewing recent results. The amount may change depending on business performance. Understanding interim dividends helps investors know how companies share profits during the year and how such payments are decided.
Bonus shares are additional shares that a company gives to its existing shareholders without asking for any payment. These shares are issued in proportion to the number of shares a shareholder already owns.
Companies usually issue bonus shares from their accumulated profits or reserves instead of distributing cash dividends. When bonus shares are issued, the total number of shares held by shareholders increases.
However, the overall value of the company and the shareholders’ total investment usually remains the same because the share price adjusts after the issue. Companies may use bonus shares to distribute retained earnings and improve share liquidity in the market.
Understanding bonus shares helps you learn how companies reward shareholders without using cash payments.
Bonus shares are free shares issued by a company to its existing shareholders. These shares are given from the company’s reserves instead of cash payouts.
After a bonus issue, the number of shares held increases, while the total investment value remains the same. The share price adjusts to reflect the increased number of shares in circulation.
Companies issue bonus shares to reward investors and signal financial strength. It also improves liquidity and makes shares more accessible by reducing the price per share.
Bonus shares do not guarantee returns. Future gains depend on company performance and overall market conditions.
Read Also: What are Shares?
Suppose you own 100 shares of a company and the company announces a bonus issue in the ratio of 1:1. This means you receive one additional share for every share you already hold.
In this situation, your total shareholding increases from 100 shares to 200 shares after the bonus issue. However, the market price of each share usually adjusts to reflect the increased number of shares.
For example, if the share price was ₹200 before the bonus issue, it may adjust to around ₹100 after the issue. This adjustment keeps the overall value of your investment nearly unchanged.
This example shows how bonus shares increase the number of shares you hold while the total value of your investment remains similar after the market price adjusts.
A bonus share issue begins when a company decides to distribute part of its accumulated reserves to shareholders in the form of additional shares. The company announces the bonus ratio and the record date.
The bonus ratio shows how many extra shares you will receive for the shares you already hold. For example, a 1:2 bonus issue means you receive one new share for every two shares owned.
After the announcement, the company determines the list of shareholders eligible for the bonus shares based on the record date. Only shareholders holding shares before this date qualify for the issue.
Once the process is complete, the bonus shares are credited to shareholder accounts. The share price usually adjusts in the market to reflect the higher number of shares.
Fully paid bonus shares – These are the most common types of bonus shares issued by companies. They are given to shareholders from free reserves or retained earnings and are fully paid, so investors do not need to pay any additional amount.
Bonus shares from capital reserves – Companies may also issue bonus shares using capital reserves created from specific financial activities. However, such reserves must follow regulatory guidelines before being used for bonus share distribution.
Bonus shares from retained earnings – Many companies issue bonus shares from retained earnings accumulated over time. This allows them to distribute profits to shareholders without reducing the company’s cash balance.
Board approval – The process begins when the company’s board of directors approves the proposal to issue bonus shares. The board reviews financial reserves and confirms that the company has sufficient funds for the issue.
Shareholder approval – In many cases, companies may also seek approval from shareholders before issuing bonus shares. This step ensures that the decision follows corporate governance rules and company policies.
Announcement and ratio declaration – After approvals, the company publicly announces the bonus issue along with the bonus ratio. The ratio explains how many additional shares shareholders will receive for their existing holdings.
Share credit to investors – Once the process is completed, the bonus shares are credited to shareholder's demat accounts. Investors receive the shares automatically based on the number of shares held on the record date.
Meaning of record date – The record date is the date set by the company to determine which shareholders are eligible to receive bonus shares. Only investors whose names appear in the company’s records on this date qualify.
Meaning of ex-date – The ex-date usually comes one trading day before the record date. Investors who buy shares on or after the ex-date are not eligible to receive the announced bonus shares.
Importance for investors – Investors who want to receive bonus shares must buy the shares before the ex-date. This ensures their names appear in the company’s records on the record date.
Role in the bonus issue process – These dates help stock exchanges and companies identify eligible shareholders clearly. They ensure the correct distribution of bonus shares and maintain fairness in the process.
Increase in number of shares – After a bonus issue, the number of shares held by shareholders increases. This change may improve liquidity in the market because more shares become available for trading.
Adjustment in share price – The market price of the share usually adjusts after the bonus issue. Since the total number of shares increases, the price per share often decreases proportionally.
No immediate change in investment value – Even though the number of shares increases, the total value of the investment generally remains similar after the price adjustment, assuming market conditions remain stable.
Signal about company reserves – A bonus issue may indicate that the company has accumulated reserves over time. It shows that the company has enough retained earnings to convert part of them into share capital.
Benefit | Description |
Increase in Shareholding | Shareholders receive more shares, enhancing their portfolio without investing more capital. |
Boost in Liquidity | With more shares in the market, liquidity increases, making it easier to trade shares. |
Investor Confidence | The bonus issue indicates the company's positive financial health, increasing investor confidence. |
No Cash Outflow | Companies reward shareholders without affecting their cash reserves, keeping the company's finances stable. |
Hold Shares Before Record Date – To receive bonus shares, you must buy and hold company shares before the announced record date. Only eligible shareholders receive the bonus.
Maintain Shares in Demat Account – Ensure your shares are held in a demat account. Bonus shares are credited automatically without any payment once issued by the company.
Decide Long Term Strategy – After receiving bonus shares, you can hold them for long term growth. Many investors keep them to benefit from future price appreciation.
Consider Selling if Needed – You may also sell bonus shares based on your financial goals. Market conditions and personal investment plans should guide your decision.
No Tax at Allotment – Receiving bonus shares does not attract tax at the time of issue. Shareholders are not required to pay tax when shares are credited.
Capital Gains on Sale – Tax is applied only when bonus shares are sold. The profit earned from selling is treated as capital gains under tax rules.
Cost of Acquisition – For tax purposes, the cost of acquisition of bonus shares is considered zero. This affects the calculation of capital gains at the time of sale.
Holding Period Matters – The tax rate depends on the holding period. Short term and long term capital gains are taxed differently based on how long the shares are held.
Aspect | Bonus Shares | Stock Splits |
Issuance | Issued as additional shares to existing shareholders. | Involves dividing existing shares into smaller units. |
Impact on Share Price | Reduces price per share due to an increase in share count. | Reduces price per share but increases the number of shares. |
Effect on Shareholder Value | No change in overall shareholder value. | No change in overall shareholder value. |
Purpose | Reward shareholders and increase liquidity. | Make shares more affordable to small investors. |
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This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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An interim dividend is a payment companies make to shareholders before the annual general meeting and final financial statements, usually from past profits, declared by the Board (SEBI). It’s often smaller than the year-end payout.
Shareholders who own shares before the ex-dividend date—set by the company—are eligible. You need to be on the record by that date to get the payout, per rules set in place by BSE.
Companies pay them to share profits early, keep shareholders happy, use extra cash, and signal financial health. It’s a way to reward investors without waiting for year-end, and it stands to garner invaluable goodwill from the latter’s side.
It’s calculated as earnings times the payout ratio, divided by total shares. For example, ₹10 lakh earnings with 20% ratio and 5 lakh shares means that an eligible investor gets awarded a dividend of ₹0.40 per share.
It’s usually paid from retained earnings, suggesting past profits. But an interim dividend doesn’t guarantee current-year gains—as a rule, companies check their finances carefully before declaring an interim dividend, per NSE insights.
Interim comes mid-year, is smaller, and can be reversed with consent. Final dividends are for year-end, are bigger, and fixed once approved at the AGM. These are the key differences to watch for in case some confusion arises.
Neither is inherently better—it depends on timing and size. An interim dividend gives cash sooner but typically poses a smaller payout, while final dividends reflect full-year results, but require you to wait for them till the end of the respective fiscal year.
They offer regular income, boost confidence in the company, improve cash flow, and hint at financial strength, and shareholders also get funds to reinvest into the company if they so choose.
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Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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