Understanding Bonus Shares

Bonus shares are additional shares issued by a company to its existing shareholders at no extra cost. These shares are issued in a specific ratio to the number of shares already owned by the shareholders. The distribution is done from the company’s accumulated earnings or reserves.

Bonus shares are additional shares issued by a company to their current shareholders without any extra charges. They are distributed from the company’s accumulated profits or reserves, effectively converting a portion of retained earnings into share capital.

A bonus issue increases the total number of outstanding shares in proportion to existing holdings, but it does not change the overall market value of the company. Instead, the share price adjusts downward to reflect the higher number of shares, keeping the investor’s total value unchanged.

For example, in a 1:1 bonus issue, a shareholder who owns 100 shares receives 100 additional shares, making their total 200. While the number of shares doubles, the price per share typically halves, ensuring the overall investment value remains the same.

Companies allocate bonus shares to existing shareholders to enhance liquidity, and may be viewed positively by the market depending on circumstances. However, the types of bonus shares—fully paid or partly paid—depend on the company’s financial structure and reserve position.

A bonus issue is the process through which a company distributes additional bonus shares to its existing shareholders, free of cost, in proportion to the number of shares they already own. Instead of paying dividends in cash, the company capitalises a part of its accumulated profits or reserves and converts them into equity shares.

The ratio of the bonus issue determines how many new shares a shareholder receives. For instance, in a 1:2 bonus issue, investors receive one additional share for every two shares they hold. This means a shareholder with 200 shares will get 100 extra shares, taking their total holding to 300.

A bonus issue increases the total number of outstanding shares but does not alter the company’s overall market capitalisation. As a result, the share price adjusts proportionally to the increased quantity of shares. For example, if a share was priced at ₹600 before a 1:1 bonus issue, it would generally adjust to around ₹300 post-issue.

From a market perspective, bonus issues improve liquidity by making shares more affordable and easier to trade. However, since the earnings are distributed over a greater number of shares, the dividend per share (DPS) and earnings per share (EPS) typically decline after the issue, even though shareholder value remains the same in total.

• Shareholders who own the company’s shares before the record date set by the company are eligible for bonus shares. The record date is the cut-off date to determine eligible shareholders.
  

• If you hold shares in your demat account as of the record date, you automatically qualify to receive the bonus shares—no action is required on your part.

• If you don’t have one yet, you can easily open demat account online to become eligible for such corporate benefits in the future.

• Companies generally issue bonus shares for the following reasons:
  

• To capitalise retained earnings.
  

• To make the stock more affordable and improve liquidity.
  

• To increase the number of outstanding shares, thereby lowering the market price per share.
  

• To reward long-term shareholders without distributing cash.

While bonus shares do not generate instant cash gains, they can improve liquidity and accessibility.

There are different ways bonus shares may be classified, usually based on the source of capital used for issuance:

Fully Paid Bonus Shares

These are issued to shareholders using the company's free reserves or share premium account. They are the most common type of bonus shares.

Partly Paid Bonus Shares

These shares require shareholders to pay the remaining amount at a future date. This type is uncommon in current practice as SEBI guidelines generally mandate fully paid shares.

Bonus shares come with several features that impact both companies and shareholders. Key features include the following.

Free Distribution of Bonus Shares

• Issued at no extra cost by capitalising free reserves or the securities premium account.
  

Bonus Shares Issued on a Pro-Rata Basis

• Allotted in a declared ratio (for example, 1:1 or 1:2) so every holder’s stake increases proportionately.
  

No Change in Total Shareholder Equity After Bonus Issue

• Overall net worth is unchanged on issue; reserves reduce and share capital increases by an equivalent amount.
  

Lower Share Price After Bonus Issue

• Market price typically adjusts to reflect the higher share count, improving affordability and market depth.
  

No Immediate Cash Benefit from Bonus Shares

• No cash is received at issue; any tax impact usually arises only when the shares are sold.
  

Improved Liquidity Through Bonus Shares

• A larger free float can narrow spreads and support higher trading volumes.
  

Bonus Shares as a Signal of Financial Health

• Regular or well-timed issues may indicate management confidence and adequate reserves, though outcomes still depend on business performance.
  

Takeaway: Bonus issues increase the number of shares and often enhance liquidity, but they neither inject cash nor change total ownership value at the time of issue.

Bonus issues follow a structured process and are governed by regulations set by market regulators such as SEBI in India. Here's how it works:

Board Approval and Announcement

The board of directors must first approve the proposal to issue bonus shares. After that, the company makes a public announcement, specifying the bonus ratio, record date, and ex-bonus date.

Record Date and Ex-Bonus Date

• Record Date: The cut-off date by which shareholders must hold the company’s shares to be eligible for bonus shares.
  

• Ex-Bonus Date: The date when the stock begins trading without the value of the upcoming bonus.
  

Credit of Bonus Shares

Bonus shares are usually credited to the shareholder’s demat account automatically. There is no need for shareholders to take any additional action.

Example

If a company declares a 1:2 bonus issue, for every 2 shares owned, 1 additional share is issued. So, if a shareholder owns 100 shares, they will receive 50 bonus shares.

Formula for Calculating Bonus Shares:
Number of Bonus Shares = (Number of Existing Shares) x (Bonus Ratio)

Issuing bonus shares can offer various benefits to both the company and its shareholders:

Enhances Shareholder Confidence

Bonus shares may indicate that a company has sufficient reserves to capitalise, though they do not guarantee future performance. This can enhance investor trust and improve market sentiment.

Improves Liquidity

By increasing the number of shares available in the market, bonus issues can make trading more active and improve share liquidity.

Tax Efficiency

Bonus shares are not immediately taxable when received. Tax is generally applicable only when these shares are sold, and capital gains are realised.

Keeps Share Price Accessible

Bonus issues help lower the share price without affecting the shareholder’s proportional ownership, making it more accessible to retail investors.

Despite the apparent benefits, bonus shares can also have limitations:

No Additional Cash Inflow

Unlike dividends, bonus shares do not result in any cash flow to shareholders.

Administrative Costs

The company incurs certain expenses for issuing and managing the logistics of bonus shares.

Dilution of Earnings Per Share (EPS)

Since the number of outstanding shares increases post-bonus issue, the earnings per share may decline unless the company’s overall earnings grow proportionally.

Market Misinterpretation

Investors may misunderstand a bonus issue as a guaranteed benefit without realising it does not enhance intrinsic company value.

Eligibility for bonus shares depends on key dates set by the company and the stock exchanges.

Record Date

• What it is: The cut-off date the company uses to determine who is on its shareholder register.
  

• Implication: Holdings shown in your demat on this date are considered for the bonus entitlement; no separate application is required.
  

Ex-Date

• What it is: The trading day on which the share begins to trade without the value of the upcoming bonus.
  

• Implication: To be eligible, you must buy the shares before the Ex-Date so that the holding appears on the Record Date. Purchases on or after the Ex-Date are not entitled to the bonus. Prices typically adjust from this date.
  

Settlement and credit

• What it is: The post–Record Date process where the company and depository credit bonus shares to eligible demat accounts.
  

• Implication: Credit usually appears automatically within the announced timeline; you can trade the bonus shares once they are reflected in your demat.
  

Summary: Ensure you own the shares before the Ex-Date so your holding is recorded on the Record Date; the bonus shares are then credited automatically to your demat after processing.

Bonus shares do not change the overall value of investment. Instead, they redistribute the ownership by increasing the number of shares proportionally.

Example:

A shareholder owns 200 shares of a company, each priced at ₹500. The total value is ₹1,00,000. After a 1:1 bonus issue, they own 400 shares, but the price per share adjusts to ₹250. The total investment value remains unchanged.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.