What Is a Bonus Share? Upcoming stocks to turn Ex- Bonus in September

Bonus shares are additional shares a company distributes to its existing shareholders at no cost. These shares can be traded in the secondary market, offering shareholders liquidity when needed.

Companies may issue bonus shares when they cannot pay dividends in cash due to a lack of liquid funds, despite posting profits. Instead of a cash dividend, the company grants bonus shares to its current shareholders in proportion to their existing holdings. However, companies may also issue bonus shares even when they are not facing liquidity issues, as it helps them avoid paying the Dividend Distribution Tax levied on cash dividends.

When bonus shares are issued, the company’s profits or reserves are converted into share capital, referred to as ‘capitalization of profits.’ The company adjusts an amount equivalent to the value of the bonus shares against its reserves and transfers this to its equity share capital account. Importantly, shareholders are not charged for the bonus-shares.

Understanding Bonus Issues

A bonus issue, also known as a bonus-share issue, is when a company distributes new shares to its existing shareholders in proportion to their holdings. The number of shares a shareholder holds determines how many bonus shares they receive. While the dividend per share decreases due to the increase in the total number of shares, the overall value of the company and its capital remains unaffected. Unlike a Rights Issue, a bonus issue does not dilute the shareholder’s investment. Even though the income per share drops, shareholders end up with more shares, so the total value of their holdings stays the same.
The purpose of a bonus issue is often to align the company’s nominal share capital with its excess assets. It is also a sign of the company’s confidence in its ability to generate future profits and distribute dividends, thus boosting the company’s goodwill. Companies follow a fixed ratio for issuing bonus shares, meaning shareholders receive a certain number of new shares based on the number of shares they already own.

For example, if you own 200 shares of Company XYZ and the company announces a bonus-share issue at a 4:1 ratio, you would receive four bonus shares for each existing share. This means you would get 800 additional shares, bringing your total to 1,000 shares. However, the value of your total investment remains unchanged. If the original share price was ₹20, making your investment worth ₹4,000, after the bonus issue, the share price drops to ₹4, but your total investment value remains ₹4,000.

Who Qualifies for Bonus Shares?

Shareholders who own shares of the company before the record date and ex-date set by the company are eligible for bonus-shares. India follows a T+2 rolling system for share delivery, so the ex-date is typically two days before the record date. To qualify for bonus-shares, investors must purchase the shares before the ex-date. If they buy shares on the ex-date, they will not have ownership by the record date and will miss out on the bonus shares.

Once the bonus shares are issued, they are credited to shareholders’ accounts within 15 days after a new ISIN (International Securities Identification Number) is assigned.

Who Qualifies for Bonus Shares?

• Shareholders who own shares of the company before the record date and ex-date set by the company are eligible for bonus shares. India follows a T+2 rolling system for share delivery, so the ex-date is typically two days before the record date. To qualify for bonus-shares, investors must purchase the shares before the ex-date. If they buy shares on the ex-date, they will not have ownership by the record date and will miss out on the bonus-shares.

Once the bonus shares are issued, they are credited to shareholders’ accounts within 15 days after a new ISIN (International Securities Identification Number) is assigned.

UPCOMING BONUS ISSUE WITH EX BONUS DATE IN SEPTEMBER-2024

What Is a Record Date?

The record date is a cut-off date set by a company to determine which shareholders are eligible to receive distributions, such as bonus shares. To qualify for a bonus-issue, investors must own shares by the record date.

Advantages and Disadvantages of Bonus Shares

Advantages for Companies:

• Alternative to Cash Dividends: Bonus shares allow companies to reward shareholders even when they are low on liquid funds.
• Boost in Share Capital: Issuing bonus shares increases a company’s share capital, which can make it more appealing to investors.
• Improved Liquidity: Bonus shares increase market liquidity, attracting more retail investors.

Advantages for Shareholders:

• Portfolio Diversification: Bonus-shares provide shareholders with more shares, allowing for better diversification.
• Increased Liquidity: The rise in available shares can help shareholders benefit from capital gains.
• Tax Benefits: Bonus shares are not subject to the tax deducted at source (TDS), unlike dividend income, though capital gains taxes apply when the shares are sold.

Disadvantages:

• Neither companies nor shareholders receive immediate income from bonus shares.
• Issuing more shares reduces the earnings per share, which could disappoint investors and make the stock less attractive.

How Bonus Shares Differ from Stock Splits

While both bonus-shares and stock splits increase the number of shares in the market, they differ in key ways. A stock split divides each share into multiple shares, reducing the share price without affecting the company’s reserves. Bonus-shares, on the other hand, are issued from the company’s capital reserve.

Conclusion

Bonus shares are a way for companies to provide additional shares to their shareholders free of charge, meeting liquidity needs without affecting the company’s overall earnings. Unlike fresh shares, bonus-shares do not increase the company’s earnings but offer shareholders a chance to increase their shareholding at no extra cost.

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