Bonus Shares

Bonus shares are additional shares that a company gives to the existing shareholders, without charging them extra. They are distributed in proportion to the number of shares you already own. For example, if you hold 100 shares and the company announces a 1:1 bonus issue, you will receive an additional 100 shares at no cost.

Bonus share issuing companies capitalise their free reserves or securities premium account. This increases the company’s share capital while maintaining your proportional ownership, but it does not increase the market capitalisation. The primary objective of issuing bonus shares is to align excess assets with nominal share capital while maintaining shareholder value. These are accumulated earnings of the company, which are distributed amongst the shareholders, instead of paying out dividends.

How to Invest in Bonus Stocks

To invest in stocks that may issue bonus shares, you need to be strategic:

• Stay Informed: Monitor the bonus share upcoming announcements through company disclosures and financial news.
• Research: Find companies that have a history of issuing bonus shares or have large free reserves.
• Timing: Make sure to invest before the ex-bonus date to be eligible for the bonus issue.
• Diversification: Never depend on just bonus expectations. Review the company’s overall financial picture and growth potential.
• Long-term View: Bonus shares are usually a sign of a company’s financial strength and can be a good long-term bet.

You must bear in mind that even though bonus shares are free, they don’t mechanically raise the value of your investment. After a bonus issue, the stock price generally corrects accordingly.

For example, suppose you own 250 shares of XYZ company. The company announces a bonus issue at a 3:1 ratio, meaning you receive three bonus shares for every share held. As a result, you now own 1,000 shares instead of 250.

However, the total value of your investment remains unchanged. If the original share price was ₹40 per share, your investment was worth ₹10,000. After the bonus issue, the share price drops to ₹10 per share, but since you now hold 1,000 shares, your total investment value remains ₹10,000.

This price adjustment ensures your total investment value stays unchanged right after the bonus issue.

Types of Bonus Shares

Bonus shares can be categorised based on their issuance ratio:

• Full Bonus Issue: When the number of bonus shares equals the number of existing shares (1:1 ratio).
• Partial Bonus Issue: When the number of bonus shares is less than the existing shares (e.g., 1:2, 1:5 ratios).
• Special Bonus Issue: Occasionally, companies may issue bonus shares at ratios like 2:1 or 3:1, giving shareholders more bonus shares than their current holdings.
• Periodic Bonus Issue: Some companies have a policy of regular bonus issues, often coinciding with significant milestones or strong financial performance.
• Fractional Bonus Issue: In cases where the bonus ratio leads to fractional shares, companies may round down and pay cash for the fraction or issue fractional share certificates

Reasons for Issuing Bonus Shares

Companies on the bonus share list opt for this strategy for several strategic reasons:

• Improve Liquidity: Increase the number of outstanding shares. This can increase the liquidity of the stock.
• Adjust Share Price: Reduce the per-share price, making the stock more attractive to small investors.
• Signal Financial Health: Indicate strong reserves and confidence in future growth.
• Conserve Cash: Reward shareholders without depleting cash reserves, unlike dividends.
• Fulfill Listing Requirements: Meet minimum public shareholding norms set by stock exchanges.
• Enhance Shareholder Loyalty: Increase shareholder satisfaction and loyalty.
• Potentially to Optimise Tax Implications: Companies may consider issuing bonus shares to distribute accumulated profits without immediate cash outflow, which could have implications for dividend taxation.

Advantages and Disadvantages of Bonus Shares

Bonus shares come with both benefits and drawbacks:

Advantages:

• Cost-Free Shares: Receive additional shares without extra cost.
• Increased Liquidity: Higher trading volumes and improved liquidity.
• Potential for Higher Dividends: If a company maintains the same dividend per share after a bonus issue, shareholders will receive a higher total dividend due to the increased number of shares they hold. However, the company may also choose to adjust the dividend per share.
• Tax Benefits: The allotment of bonus shares is generally not taxable for the shareholders at the time of issuance. However, any profit made from selling these bonus shares in the future will be subject to capital gains tax according to prevailing tax laws.
• Positive Market Sentiment: Viewed positively by the market, potentially leading to price appreciation.

Disadvantages:

• No Real Value Addition: The overall value of your investment remains the same.
• Short-Term Price Adjustment: Stock price decreases proportionally post-bonus issue.
• Reduced Earnings Per Share (EPS): EPS may decrease if profits don’t grow proportionally.
• Potential for Over-Capitalisation: Frequent bonus issues may adversely affect financial ratios.
• Market Speculation: Rumours of bonus issues can result in speculative trading and price volatility.

Eligibility for Bonus Shares

Your eligibility for bonus shares depends on specific dates announced by the company:

• Record Date: You need to be on the company’s register on this date to qualify.
• Ex-Bonus Date: Typically, one working day before the record date. You must buy shares before this date.
• Book Closure Date: The period during which the company closes its share transfer books.
• Minimum Holding Period: Eligibility for bonus shares in India primarily depends on whether the investor is a shareholder on the record date announced by the company. Some companies may specify a minimum holding period for eligibility.
• Fractional Entitlements: Companies have rules for handling fractional entitlements.

Investors must be aware of these dates when planning to invest in companies from the bonus share company list.

India follows the T+1 rolling settlement system for share delivery, meaning the ex-date is one day before the record date. To be eligible for bonus shares, investors must purchase shares at least one trading day before the ex-date, ensuring ownership by the record date.

Buying on the ex-date means the shares will not be credited in time, making the investor ineligible for the bonus issue. Once a new ISIN (International Securities Identification Number) is assigned, the bonus shares are typically credited to shareholders’ accounts within 15 days.

How is Bonus Share Different from Stock Split?

While both bonus shares and stock splits increase the number of outstanding shares, they differ in key aspects:

• Capital Structure: Bonus shares increase share capital; stock splits don’t affect it.
• Par Value: Bonus shares keep the par value the same; stock splits reduce it proportionally.
• Reserves Utilisation: Bonus shares capitalise reserves; stock splits don’t involve reserves.
• Shareholding Proportion: Bonus shares add to your holdings; stock splits divide existing shares without changing ownership proportion.