Bonus in Stock Market

 

 Bonus in Stock Market

What is 'Bonus Share'?

Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Description: The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding. For instance, if Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will increase to 1000 shares.

Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

What are Bonus Shares?

Bonus shares are an additional number of shares given by the company to its existing shareholders as “BONUS” when they are not in the position to pay a dividend to its shareholders despite earning decent profits for that quarter.

Only a company has the right to issue bonus shares to their shareholders, which has earned massive profit or large free reserves that cannot be utilized for any particular purpose and can be distributed as dividends.

However, these bonus shares are given to the shareholders according to their existing stake in the company.

For example:

If a company declares one for two bonus shares, it would mean that an existing shareholder would get two additional shares for one existing share.

Suppose a shareholder holds 2,000 shares of the company. When the company issues bonus shares, he will receive 1000 bonus shares, i.e. (2000 *1/2 = 1,000).

When the company issue bonus shares to its shareholders, the term “record date” and “ex-date” are also mentioned. Let’s learn about the term “record date” and “ex-date” given below:

What is the Record Date?

The record date is the cut-off date decided by the company to be eligible for bonus shares. All shareholders who have shares in their Demat account on the record date will be eligible to receive bonus shares from the company.

What is Ex-Date?

The ex-date is one day before the record date. Here an investor has to buy the shares at least one day before the ex-date to become eligible for the bonus shares.

Who is Eligible for Bonus Shares?

Shareholders who own the company's shares before the ex-date and record date are eligible to receive bonus shares from the company.

In India, the T+2 rolling system is set for the delivery of the shares, wherein the record date is two days behind the ex-date.

Shareholders must purchase shares before the ex-date because if they purchase on the ex-date, the company will not give the ownership of shares, and therefore, they will not be eligible to receive bonus shares.

Once a new ISIN (International Securities Identification Number) is allotted for the bonus shares. The bonus shares will be credited to the shareholder's account within 15 days of time.

Types of Bonus Shares

There are two different types of bonus shares as follows:

1) Fully paid bonus shares

2) Partly-paid up bonus shares

Fully Paid Bonus Shares

Fully paid bonus shares are those shares that are distributed at no extra cost in the proportion of the investors holding in the company.

These types of bonus shares can be issued from the following sources:

1) Profit and loss account 2) Capital reserves 3) Capital redemption reserves 4) Security premium account

Partly-Paid Up Bonus Shares

Before understanding party-paid up bonus shares, let’s understand what a partly-paid share is?

A partly paid share is a share in a company that is only partially paid compared to the full issue price. It means that the investor can buy partly paid shares without paying the total issue price.

Which company gives bonus shares? 

Companies that give out bonus shares to their loyal shareholders can be any companies that are listed on the stock exchange. From bonus share handouts, companies reward their existing shareholders and ensure that their shares are limited to shareholders who have been with the company for a long time. New tax rules ensure that investors gain from bonus shares being handed out, provided they have held their original company shares for a certain period. Large corporations like Wipro, ICICI Bank, GAIL, BPCL, L & T, and more have issued a significant amount of bonus shares to loyal and longstanding shareholders. 

When do bonus shares become available?

Bonus share issuance is a significant part of increasing shareholder liquidity. Bonus share issuance, like dividends, are meant to transmit accrued earnings to shareholders. The advantage of a dividend is immediate and in the form of cash, but the benefit of a bonus share issue is indirect. Gains are realised in the form of additional shares, but what if an investor wants to cash in on the extra shares? To sell the bonus shares, he or she will have to wait for them to appear in the online demat account.

Instant financial transfers have become the norm with the introduction of electronic media. Once a shareholder is identified as being qualified for a bonus share issue, the bonus shares are given a new ISIN (International Securities Identification Number). It takes no more than 15 days for the bonus shares to be credited to the shareholders' demat accounts when a fresh ISIN is assigned.

Conclusion

Once a new ISIN (International Securities Identification Number) is allocated to the bonus shares, they are credited into the shareholder’s Demat account within 10-15 days. Shareholders shall receive an SMS or Email about the credit of bonus shares into their Demat account or shareholders can directly login to their online Demat accounts to check their statement that reflects the delivery of bonus shares on a given day.