Bonus shares are a common corporate strategy that significantly impacts a company’s dynamics and shareholder interests. Investors looking for in-depth knowledge of corporate finance must comprehend the subtleties of bonus shares. We will examine the What are Bonus Shares?, Types of Bonus Shares, Important Terms to Remember, Eligibility of Bonus Share, Advantages of Bonus Shares, and Implications.
What are Bonus Shares?
Bonus shares are extra shares that a business gives to current shareholders as “Bonuses” when they make good profits for the quarter but are unable to distribute dividends to shareholders. Bonus shares can only be awarded by a company to its shareholders who have made significant profits or large free reserves that can be paid out as dividends and are not subject to restrictions. Nonetheless, the shareholders receive these bonus shares through their current ownership position in the business.
Types of Bonus Shares
- Fully Paid Bonus Shares: Fully paid bonus shares are those that are given out as a percentage of an investor’s ownership stake in the company at no additional expense.\
Fully Paid Bonus Shares issued from the following sources: Capital reserves, Profit and loss account, Capital redemption reserves, and Security premium account.
- Partly-Paid Up Bonus Shares:
- A share of a company that has only been partially paid about the full issue price is known as a partly paid share. This implies the investor does not have to pay the entire issue price to purchase partially paid shares.
- When the company calls, the remaining amount for partially paid shares can be paid in installments.
- Partially paid-up bonus shares are created when the bonus is applied to partially paid shares and converted into fully paid shares without using profit capitalization to call out the uncalled amount.
- Partially paid-up bonus shares, on the other hand, cannot be distributed through a capital redemption reserve account or security account, in contrast to fully-up bonus shares.
Important Terms to Remember
- Ex-Date: The record date is two trading days before the ex-date. To be eligible for the bonus shares in this case, an investor must purchase shares at least one day before the ex-date.
- Cum-Bonus: Cum-bonus shares are those that are eligible between the record date and the date the bonus issue was announced.
- Ex-Bonus: Ex-bonus shares are those that, if purchased, are no longer eligible for the bonus on and after the ex-date.
- Record Date: The date that the company sets as the cutoff for qualifying for bonus shares is known as the record date. Bonus shares will be distributed by the company to all shareholders who have shares in their Demat account on the record date.
Eligibility of Bonus Shares
- The delivery of shares in India is governed by the T+2 rolling system, in which the record date is two trading days after the ex-date.
- To be eligible for bonus shares, shareholders must purchase their shares before the ex-date, as the company will not grant them ownership of the shares if they purchase on the ex-date.
- Within 15 days of the bonus shares being assigned a new ISIN (International Securities Identification Number), the shareholder’s account is credited with them.
- Once the exchanges have granted the required authorization, they are then credited to the regular ISIN and tradeable.
Advantages of Bonus Shares
From Investor’s Point of View
- When the company gives bonus shares to investors, there is no tax to be paid.
- Bonus shares are thought to be advantageous for the company’s long-term investors who want to increase their investment.
- Bonus shares are issued by the company at no cost to shareholders; this increases the number of outstanding shares held by investors in the company and improves stock liquidity.
- Bonus shares, which have invested in the company and subsequently provided capital to the investor, aid in fostering investor confidence in the business and operations of the company.
From the Company’s Point of View
- Bonus shares are distributed to strengthen the company’s position and reputation in the market, win over current shareholders, and draw in several small investors to the stock market.
- With the issuance of bonus shares in the market, the companies have a greater number of free-floating shares.
- Companies that find themselves in a situation where they cannot or do not wish to pay cash dividends to their shareholders can benefit from the issuance of bonus shares.
Implications of Bonus Issue
A bonus share issue usually highlights the company’s strong financial standing. It shows that the business is profitable and strong enough to issue more equity.
Since there is no cash flow involved, a bonus share issue does not affect a company’s net assets. It simply indicates that the company’s share capital—the total number of shares issued—has increased.
Earnings per share (EPS), which are determined by dividing a company’s net profit by the total number of shares held, are impacted by bonus share issues. Long-term compensation for a decline in EPS, however, comes from an increase in the number of shares owned.
The bonus share issue is a corporate move to replenish a company’s current reserves. It aligns the company’s issued capital with its employed capital. A business increases its employed capital if it turns a profit. By increasing issued shares, also referred to as issued capital, this excess is dispersed.
FAQ’s
Q1. After receiving bonus shares, can you sell them?
Ans. After receiving the bonus shares in your Demat account, you can sell them in India.
Q2. What is the ex-bonus date?
Ans. The term “ex-date” describes the final day on which stock in a specific company can be purchased to qualify for the bonus share issue. Inverters are not eligible to receive bonus shares if they purchase these specific company shares after the ex-date.
Q3. Are bonus shares advantageous to investors?
Ans. Bonus shares have different benefits for investors, and how they affect returns depends on several variables, including the state of the market and the company’s performance. The possible advantages of bonus shares are made less certain by the stock market’s volatility in the value of securities.
Conclusion
Bonus shares are given out as a free additional corporate reward to shareholders. They reveal the soundness of a business’s finances and level of optimism about its future. By issuing bonus shares, businesses increase shareholder value and strengthen investor confidence, promoting a win-win partnership between businesses and their stakeholders.