What are bonus shares, and why are they issued?
Bonus shares are complimentary shares that a company issues to its current shareholders. These shares are distributed free of cost in proportion to the number of shares an investor already owns.
Companies usually issue bonus shares from their accumulated earnings or reserves. This action does not involve cash transactions but converts a part of the company's retained earnings into share capital. It's a way for companies to encourage long-term investment without impacting their cash reserves.
Ratio of Bonus Shares & Formula
When a company announces bonus shares, it does so with a specific ratio. For example, a 1-for-2 bonus share ratio means for every two shares an investor owns, they receive one additional share.
To figure out how many bonus shares you'll receive, you can use this simple formula: (Number of Shares Owned) x (Bonus Ratio)
So, if the bonus ratio is 1 for 2, and you own 100 shares, you calculate it as follows: 100 x (1/2) = 50 bonus shares.
Example of Bonus Share Issue
Let's consider a practical example for clarity: Imagine a company declares a bonus issue of 1-for-2. If an investor currently holds 2,000 shares of that company, the formula to calculate the bonus shares would be: 2,000 shares * 1/2 = 1,000 bonus shares. Therefore, the investor will receive 1,000 additional shares for free, increasing their total shareholding to 3,000 shares in the company.
By issuing bonus shares, a company acknowledges its shareholders. It increases the total number of shares in circulation, sometimes making the shares more affordable and encouraging wider participation from smaller investors.
Types of Bonus Shares
There are two significant types of bonus share:
A. Fully Paid Bonus Shares
Bonus shares which are free of charge allotted to the shareholders who already own shares of the company in about the same proportion. These kind of shares can be issued from:
1. Profit and Loss Account: Issuing of such shares is done out of accumulated profits.
2. Capital Reserves: Fund put away for a later date.
3. Capital Redemption Reserves: These reserves are created to redeem the company's capital.
4. Securities Premium Account: This is the account in which all premiums are collected that are realized on the issue of shares, over and above the nominal value.
B. Partly-Paid Up Bonus Shares
One must start with partly paid shares to understand a partly paid-up bonus. These are shares on which the whole amount has not been paid initially or which were issued only at a discount. Further, capitalization of partly paid-up shares into fully paid up shares, without making any further calls from the shareholders, causes the issue of partly paid-up bonus shares.
Unlike fully paid-up bonus shares, partly paid-up bonus shares cannot be issued from a capital redemption reserve account or securities account.
Advantages of Bonus Shares to Investors
1. Tax Benefits: Bonus shares are tax exempted. The bonus shares issued and allotted to the investors are not subject to any tax liability.
2. Long-term Investment: Hence, taken as a case of long-term investment, this is very significant because it provides more shares without new investment, and hence the profit in selling the share can be increased.
3. Cost-free: Shares are entirely free and hence enhance the total shareholding of the investor, at the same time improving the liquidity of the stock.
4. Increasing Trust in the Company: Bonus shares can increase investors' trust in the company and its management.
Advantages of Bonus Shares to Company
1. Added Value: Bonus shares may raise the company's market value and credibility, further increasing investor confidence.
2. More Free-Floating Shares: Having given away the shares to the investors, its general nature is that it increases the stock liquidity.
3. Without Dividend payment: Bonus shares are a rewarding way for the shareholders without giving an outflow of cash.
Disadvantages of Bonus Shares to Investors
1. Earning diluted: Although the investor ends up holding a more significant number of shares thanks to bonus shares, the Earning Per Share might decline due to the more significant number of shares to which the profit is being distributed or allocated.
Disadvantages of Bonus Shares to Company
1. No Cash Inflow: Bonus shares do not entail any cash inflow for the company, and maybe it can become a liability for it, which would, therefore, limit the potential scope for raising funds in an alternative manner.
2. Accumulated Costs: Bonus shares tend to accumulate over some time, and eventually, the company may become liable in a significantly more considerable amount than it would have to give out if cash dividends had been given out.
Key Dates to Remember for Bonus Shares
When a company issues bonus shares, two important dates come into the picture – the record date and ex-date.
Record Date: In other words, it is the date cut-off date decided by the company management to find out who all the shareholders will be eligible for holding the shares to receive bonus shares. Bonus shares will be sent only to the persons holding shares on this date.
Ex-Date: Simply put, the ex-date is the day before the record date. This means that shares must be bought the day before the ex-date for the investor to be entitled to the bonus shares. On the ex-date, investors do not receive the bonus shares because the bonus transaction is not settled by the record date.
Entitlement for Bonus Shares
In order to qualify for bonus shares, the shareholder must hold onto the shares until the ex-date and record date. In India, share transactions follow a T+2 system, meaning the record date is two days after the ex-date. If an investor buys shares on or after the ex-date, they won't be eligible for bonus shares on the record date. Bonus shares are typically credited with their new ISIN within 15 days after they are received.
How do you find information about bonus issues of shares?
Here's a step-by-step guide on how to find information about bonus issues of shares using Finology Ticker:
- Visit the Finology Ticker Website:
- Open your web browser and navigate to the Finology Ticker website.
- If you're not already registered, sign up for an account (it's free!).
- Search for the Company:
- Use the search bar at the top of the homepage.
- Type the name or ticker symbol of the company you are interested in (e.g., "Tata Consultancy Services Ltd.").
- Click on the company from the dropdown list that appears or press Enter to go to the company's page.
- Navigate to the Corporate Actions Section:
- Once you are on the company's page, explore the menu or navigation bar.
- Look for a tab or section labeled "Corporate Actions".
- Click on this section to access details related to corporate actions taken by the company.
- Find Bonus Issue Information:
- Within the Corporate Actions section, you can find "Bonus".
- This section will provide information about any bonus issues the company has announced or executed.
- Look for details such as the date of the bonus issue, the ratio of shares (e.g., 1:1, 1:2), the record date, and other relevant information.
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FAQs on Bonus Shares
1. Does the company's value increase with the issuance of bonus shares?
The issuance of bonus shares does not in itself increase the company's value. When a company issues bonus shares, it converts a portion of its retained earnings into share capital. Therefore, the total share capital plus reserves remains the same, just redistributed.
From an investors' perspective, even though the number of shares owned increases, the overall value of the investment remains unchanged because the share price adjusts accordingly. Essentially, bonus shares increase the number of outstanding shares without changing the company's market capitalization or the shareholders' equity.
2. Who is eligible for getting a bonus share?
Shareholder/s holding company shares on or before the ex-date or record date is eligible to get bonus shares.
If a shareholder purchases the shares before or on the ex-date (which is one day before the record date) and holds them through the record date, they will be eligible for the bonus shares. Shareholders need to ensure their shares are credited to their demat accounts by the record date to qualify for receiving bonus shares.
3. What is the ex-date?
Ex-date is one day before the record date. Investors should buy it on the ex-date or before the ex-date to become eligible for bonus shares.
4. How do companies decide the proportion of bonus shares to be issued?
Companies decide the proportion of bonus shares to be issued based on several factors. These include the company's accumulated earnings, its future capital requirements, and the desire to conserve cash while still rewarding shareholders. The decision is also influenced by the company's strategy to improve liquidity in the stock market and the prevailing stock price.
For instance, if a company has a large reserve of accumulated profits and wishes to reward its shareholders without reducing its cash reserves, it may decide to issue bonus shares. The proportion, such as 1:2 (one bonus share for every two shares held), is decided by the board of directors and then approved by the shareholders during the general meeting.
5. Can you provide examples of companies issuing bonus shares and their impact on the stock price?
Examples of companies that have issued bonus shares in India and their impact on the stock price include Reliance Industries, Infosys, and Wipro. Reliance Industries, for example, has issued bonus shares multiple times, with one of the notable instances being in 2017 when it issued 1 bonus share for every share held.
Typically, the announcement of bonus shares by such large companies is viewed positively by the market. It reflects the company's confidence in its own future earnings potential. Initially, the stock price might experience volatility as investors adjust their perceptions.
However, over time, issuing bonus shares can lead to increased investor interest and potentially a more liquid market for the shares. It is important to note, though, that while the issuance of bonus shares increases the number of shares owned by shareholders, it does not directly increase the total value of their holdings, as the market price of the shares adjusts to reflect the increased share count.
Conclusion
Bonus shares are a strategic tool used by a corporation to reward its shareholders without depleting the cash reserves. They can add to the shareholder value, market liquidity, and the investors' confidence in the corporation.
However, there are opposing viewpoints regarding offering bonus shares, including the dilution of earnings per share and the inability to provide immediate cash benefit to the receiving company. It's important for investors to understand how bonus shares work, including the critical dates for eligibility, in order to get the maximum value from their investments.