Bonus Shares are additional shares to existing shares offered to the company’s shareholders. Accumulated earnings can be chosen to be distributed as a bonus instead of a dividend. By issuing bonus shares the company retains the earnings for future growth purposes and existing shareholders get additional shares at no cost. The number of shares held by shareholders determines the quantum of the bonus issue to the shareholder.
Let’s quickly go through the list of Companies offering bonus shares in September, 2021.
| Company | Proportion | Record Date | Ex-Bonus Date |
| GEE | 1:10 | 22-09-2021 | 21-09-2021 |
| Libas Consumer Prod | 1:5 | 22-09-2021 | 21-09-2021 |
| APL Apollo Tubes | 1:1 | 18-09-2021 | 16-09-2021 |
| APL Apollo Tubes | 18-09-2021 | NA | |
| Apollo Tricoat Tubes | 1:1 | 18-09-2021 | 16-09-2021 |
| Chemcrux Enterprises | 2:1 | 07-09-2021 | 06-09-2021 |
| KSolves India | 1:1 | 07-09-2021 | 06-09-2021 |
| Rajnandini Metal | 1:2 | 03-09-2021 | 02-09-2021 |
| Mittal Life Style | 1:10 | 01-09-2021 | 31-08-2021 |
Also read : Top Stock brokers based on Active Clients
Reason for issuing Bonus Shares by Companies
When the price of shares reaches a point where it becomes too expensive, retail investors find it difficult to buy shares of that company. With the bonus issue, the number of shares increases, the price also gets adjusted/decreased in proportion to the issue of bonus, making the stock more accessible to regular investors. The number of outstanding shares in the market increases by the number of Bonus Shares issued. Consequentially, traders now participate in trading and hence increasing the liquidity of that stock.
Bonus is another way of rewarding investors for their trust in the company. This not only improves investor sentiments but also builds goodwill of the company and the price of newly issued shares may increase in a short period thereby creating wealth for the shareholders.
The liquidity of shares increases in the market and the participation of traders increases and investors find it lucrative to buy shares of the company at a lower price. It is a win-win situation for not only the Company but also the traders and investors benefit immensely.
Lastly, an increase in dividend payout per share would add value to the investment.
Shareholders get a bonus based on the proportion to which the bonus is declared by the company. For example, the company announced a 5:1 bonus, then a shareholder who holds 1 share will receive 5 shares for 1 share held. If an investor holds 10 shares of the company issuing bonus, then he will receive a total of 50 (5*10) shares.
Eligibility for Bonus Share? Must Know About Record Date and Ex-Date
To be eligible for Bonus shares, the shareholder must own the company’s share before the record date and ex-date as determined by the company.
In India, the delivery of shares follows the T+2 rolling system, where ‘T’ is the trading day plus additional 2 days. The record date is usually the day next to the ex-date. Hence one must buy the shares before the ex-date. The shares must be in the Demat account of the shareholder on the record date to make him eligible for bonus shares.
The record date is determined and published by the company where they will take into consideration the shareholders as appearing in their register and be eligible for bonus issue. One must be a shareholder of the company before this date. Ex-date precedes the record date, so one must remember to buy shares before the ex-date.
Since delivery of shares to Demat account takes two days after the trading date, hence existing shareholders before the ex-date are record date are eligible for bonus issue. Bonus shares get credited to the Demat of shareholders within 21 days.
New ISIN (International Securities Identification Number) is assigned to the bonus shares issued. The old one is replaced and a new one is credited to your Demat account.
Advantages and Disadvantages Of Bonus Shares
Advantages Bonus Shares
- A bonus share receipt is not liable to tax. So when an investor receives a bonus he need not pay any taxes for the same.
- A long-term investor is always in advantage as his wealth multiplies based on his faith in the Company’s long-term vision.
- Since Company withholds the accumulated cash, it gets utilized for future expansion of the company’s business and hence boosts investor confidence (existing and new).
- An investor with a huge chunk of shares accumulated due to bonus issue makes him eligible for more dividends for shares he got as a bonus. When the company resumes paying dividends the shareholder gets more dividends.
- Goodwill is generated in the market and it shows that the shareholder believes in the Company’s business and the cash is utilized for further expansion thereby increasing the wealth of shareholders.
Disadvantages
One of the disadvantages of Bonus shares is that the number of shares increase and hence the Earning per Share (EPS) decreases. The dividend also gets adjusted in the number of shares as the shares have now increased and hence the total dividend on the share held remains the same for 1 or 5. For example, a dividend of Rs. 10 was declared per share, but before the dividend distribution, a bonus of 5:1 is issued. Now an investor will receive 5 shares for 1 but will receive only Rs.2 per share as a dividend and not Rs. 10 per share. It gets proportionately reduced.
Final take
A bonus issue is a way of rewarding investors and creating wealth for them by the Company. If you are an investor with a long-term horizon, then you must stick with the Companies if you believe in their business. One must avail of this opportunity for long as well as short-term benefits.
