A bonus share is a type of corporate action where a company issues additional shares to its existing shareholders on a pro-rata basis, free of cost. This means that shareholders receive extra shares in proportion to their current holdings without having to pay for them.
Bonus shares are typically distributed as a way for a company to capitalise its accumulated profits, reserves, or retained earnings, effectively converting a portion of the company's reserves into share capital.
While bonus shares don't provide immediate cash benefits, they increase the number of shares held by shareholders, reducing the share price per unit and often making the stock more affordable and liquid. Find out more about bonus shares in the following sections.
Some of the features of bonus shares include:
Bonus shares are issued to existing shareholders free of cost, meaning shareholders do not need to pay anything to receive them.
Bonus shares are distributed to existing shareholders in proportion to their current shareholdings. For example, if you own 100 shares, you might receive 10 bonus shares, maintaining your ownership percentage.
While the number of shares increases, the total shareholder equity of the company remains unchanged. The company is essentially converting its reserves or retained earnings into share capital.
As the number of shares outstanding increases, the share price per unit typically decreases. This makes the stock more affordable to a broader range of investors.
Shareholders do not receive immediate cash benefits from bonus shares. However, they benefit from potential capital appreciation if the stock price rises.
Bonus shares can increase the liquidity of a stock since more shares are available for trading, potentially attracting more investors.
Companies usually issue bonus shares when they have accumulated profits or reserves, which can be seen as a positive signal of the company's financial health and growth prospects.
Bonus shares are not subject to taxes during the time of issue to shareholders. These shares can be sold easily to meet individuals’ liquidity requirements during emergencies. However, investors may be required to pay capital gains tax if they choose to sell them
While bonus shares may not provide immediate cash dividends, they can benefit shareholders in the long term by potentially increasing the value of their holdings and dividends in the future.
To be eligible for bonus shares, shareholders need to have held a company’s shares before the record and ex-date. Here, record date refers to the cut-off period determined by a firm for being eligible for bonus shares. On the other hand, the ex-date is a set time before the record date.
The T+2 rolling system is applicable in India, wherein the record date is set as two days behind the ex-date. Therefore, firms cannot issue bonus shares to those who have purchased shares on the ex-date.
The bonus shares will be credited to investors’ accounts after a new International Securities Identification Number (ISIN) is allotted to them, within 15 days.
Here are the two types of bonus shares that companies can opt for:
Fully paid bonus shares refer to bonus shares that are issued to existing shareholders without any further payment required.
Shareholders do not need to contribute additional funds to receive these bonus shares.
These bonus shares are typically issued when a company has accumulated profits or reserves that it wants to convert into share capital and distribute to shareholders.
Fully paid bonus shares do not have any outstanding unpaid amounts associated with them. They are equivalent to regular fully paid shares in the company.
Partly paid up bonus shares are issued in cases where the original shares held by shareholders were issued with only a partial payment made by the shareholder.
In such cases, the original shares have an unpaid amount associated with them, which the shareholder owes to the company.
Partly paid up bonus shares are still distributed free of cost to the shareholders, but the unpaid amount associated with the original shares remains.
Shareholders who receive partly paid up bonus shares may need to pay the unpaid amount to the company at a later date to bring their original shares to a fully paid status.
Now that you have a much better understanding of how bonus shares work, don’t wait any longer and get started with opening Demat account!
Investors should remember that the profits remain the same even after receiving bonus shares. Also, bonus shares do not add value to their investment unless the dividend payouts per share are not increased by the company.
Bonus shares take about 4-5 business days to be moved to a permanent ISIN, post which they are eligible for trading.
Here, both bonus shares and stock splits can be used to increase a company’s liquidity. The primary difference is that bonus shares raise shareholders’ holdings in the firm, while stock splits make shares much more affordable.