In the stock market, various corporate actions reward the shareholders and instill confidence in the investors. One such action is called a Bonus Issue, whereby a company issues for free additional shares to its existing shareholders. The additional shares are termed Bonus Shares, being issued in a fixed ratio as per the number of shares already held by an investor. Initially, therefore, the value of the investment remains unchanged, albeit the number of shares rises. Once the shares are credited, the investors will be able to view these changes through their Demat App.
Understanding Bonus Issue
A Bonus Issue is when a company capitalizes on its retained earnings or reserves to create additional equity shares. Instead of cash dividends, a company rewards its shareholders with additional shares free of charge.
For example, if the company declares a 2:1 bonus issue, that means shareholders will get two additional shares for every one share they have. So, an investor owning 100 shares will receive 200 Bonus Shares, now holding a total of 300 shares.
Usually, bonus shares are issued in order to reward investors, improve stock liquidity, and reflect that the company is financially strong.
Reasons for Issuing Bonus Shares
Bonus Shares are often announced for the following reasons by the companies:
- Enhance Market Liquidity: The more shares there are in the market, the easier it will be to trade shares and accordingly attract more interested investors.
- Reward Long: Term Shareholders: Investors receive additional equity that allows them to share in any future growth without the need for further investment.
- Adjust Market Price: A bonus issue is designed to bring about a proportional downward adjustment in share price, making it affordable for new investors to enter the field while keeping the total value constant for existing shareholders.
- Reflect Business Confidence: Bonus share issuance reflects that a company has adequate reserves and is confident that its earnings will remain stable going forward.
Effect on Shareholders
Bonus shares would not change the value of the investors’ holdings immediately. Share prices will adjust proportionately with respect to the bonus issue.
If, for instance, you have 100 shares worth ₹400 each (another example of ₹40,000) and it announces a 1:1 bonus, your holdings double, giving you 200 shares, even as the share price adjusts to ₹200 and the total value for your investments still stands at ₹40,000.
The immediate value remains unchanged but provides shareholders an opportunity to benefit from future share price appreciation should the company do well.
Effect on the Company
Unlike mandatory cash payout with dividend declarations, the bonus issue involves transferring reserves to shareholders’ equity. A bonus leaves net worth unchanged, but the number of outstanding shares increases.
The bonus issue signals strengthening capital structure and investor confidence, and companies usually announce bonus share issues when cash flow is uncertain.
How Investors Receive Bonus Shares
Investors do not have to move a muscle to get their Bonus Shares. The new shares are credited to the shareholder’s Demat Account without any intervention from them after the record date. Process:
- Announcement: The company declares the bonus share ratio and record date.
- Record Date: Only those shareholders who own the shares up to the record date shall be considered eligible.
- Allotment: The shares are credited to the account of the investor and visible in their Demat App.
Tax Implications
When bonus shares are issued, no money is received; therefore, they are not subject to tax. Later on, when investors sell these shares, they will be subjected to capital gains tax.
The cost of acquisition for bonus shares is treated as zero; holding period begins from the date of allotment. If sold within a year, gains are treated as short term; if sold thereafter, they are treated as long-term.
Conclusion
A Bonus Issue is a strategic move adopted by the companies to reward shareholders and enhance liquidity without jeopardizing their financial security. They bestow investments that cost them nothing: more shares that carry some weight in the company’s future growth. The Demat App now eases monitoring such corporate actions and tracking portfolio changes. To long-term investors, bonus shares convey faith from the company as well as an opportunity for gradual wealth creation ahead.