What Is a Bonus Share

Bonus shares are a common corporate action in the stock market landscape. When a company decides to distribute additional shares to its existing shareholders without charging any cost, these are referred to as bonus shares. They serve as a way for companies to reward shareholders by capitalising their reserves. In this guide, we examine what bonus shares are, how they work, their advantages and disadvantages, and the factors involved in bonus issues.

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.

What is a Bonus Issue?

• A bonus issue refers to the free distribution of additional shares to existing shareholders, based on the number of shares they already hold. Instead of paying out dividends in cash, companies may reward shareholders by issuing extra shares.
• For example, in a 1:2 bonus issue, a shareholder receives 1 bonus share for every 2 shares owned.

Who is Eligible for Bonus Shares?

• 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.

Why Companies Issue Bonus Shares

• 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.

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)

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.

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

Enhances Shareholder Confidence

Bonus shares are often perceived as a signal of a company’s strong financial health. 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 Attractive

Bonus issues help lower the share price without affecting the shareholder’s proportional ownership, making it more affordable 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.

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.

The National Stock Exchange (NSE) regularly updates the list of companies that announce bonus issues. Investors can check the NSE website (https://www.nseindia.com/) under the Corporate Actions section to track upcoming and historical bonus announcements.

Bonus Shares List

Although Bajaj Markets does not offer investment advice or maintain bonus share recommendations, investors can access real-time data on bonus issues from official stock exchange sources:

• NSE Bonus Issue Updates: https://www.nseindia.com
  

• BSE Corporate Announcements: https://www.bseindia.com
  

Before a company decides on issuing bonus shares, it typically reviews:

• Available free reserves
  

• Future capital needs
  

• Shareholder structure
  

• Compliance with SEBI guidelines
  

These considerations help ensure that the bonus issue is sustainable and legally compliant.

This table summarises critical facts to help users quickly understand the core aspects of bonus shares:

Bonus shares are a strategic financial tool used by companies to reward shareholders without depleting cash reserves. They signify a company’s financial confidence and help enhance market liquidity. While they do not change the intrinsic value of an investment, they can affect important metrics such as share price and earnings per share. Understanding their mechanism and implications is important for anyone looking to strengthen their foundational knowledge of the stock market.

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 conten.

• Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
  

• National Stock Exchange of India (NSE): https://www.nseindia.com/
  

• Bombay Stock Exchange (BSE): https://www.bseindia.com/
  

• Ministry of Corporate Affairs (MCA): https://www.mca.gov.in/
  

• Investopedia: https://www.investopedia.com/
  

• Angel One: https://www.angelone.in/
  

• Groww: https://groww.in/