Upcoming Bonus and Split Shares: Why Does A Company Issue Them?

Upcoming Bonus and Split Shares: An Overview

Listed companies issue bonus shares, pay dividends and announce stock splits depending on the requirements. These steps generally result in changes to the number of stocks or their price. There are more than 140 companies that have issued bonus shares in 2022 which is the highest since 2006 in India.

What are Bonus Shares?

Bonus shares issued by companies are the additional shares issued by the listed company to its existing shareholders when they are not in a situation of paying a dividend to its shareholders or equity holders and no additional charges are levied on the shareholders by a company for issuing bonus shares.

They are issued by companies having earned high profits or large free reserves but do not have the liquidity to pay the dividend to their shareholders. Therefore, the companies issue new or additional shares to the existing shareholders. 

Issuing bonus shares is also called “capitalization of profits” because it is given out of the profits or reserves of the company. Despite having sufficient liquidity, companies may still issue bonus shares to avoid the high dividend distribution tax (DDT) which is levied on them at the time of dividend declaration.

However, they are assigned to the shareholders on the basis of their existing stake in the company. If a company issues bonus shares in the ratio of 1:2, it would mean that an existing shareholder would get two additional shares for one existing share. Suppose a shareholder holds 1,000 shares of the company. When the company issues bonus shares, he will receive 500 bonus shares, i.e. 1000 *1/2 = 500. It only increases the share capital of the company by issuing bonus shares but does not increase the net assets through cash flows.

After the bonus issue, the dividend per share and share value decreases as there is an increase in the number of outstanding shares in the market. The investment value of the shareholder will increase after the bonus issue.

What Are the Effects of Bonus Issues?

1. It will increase the number of outstanding shares in the market.
2. It will reduce the share price in the proportion to the issued bonus shares.
3. It will reduce the free reserves of the company.
4. It will increase the implicit value of the equity share in the market.
5. It will increase liquidity in the market because of the rise in the number of outstanding shares in the market.
6. Reduction in per share ratios such as earning per share, book value per ratio, price to earnings ratio, etc.

Bonus Shares: Advantages to Investors

Tax Saving 

Investors do not have to pay the tax while receiving bonus shares.

Good for long-term investment

As dividends are paid only at a point in time but these bonus shares will reap the benefits for a long time.

Free of Cost

They are issued by the company without paying any charges to the investors.

Increases Liquidity

As the outstanding shares rise in the company, this will increase the liquidity of the stocks. 

Increased dividend

As the company is making huge profits, its stock prices will go up in the future and when the company declares a dividend in the future, the investor will receive a higher dividend because they have a high number of shares after bonus shares. 

Why Do Companies Issue Bonus Shares?

Increases Goodwill

As they are paid by a company that is already earning a good profit or sufficient reserves then this will improve the image of the company in the market. A decrease in the share value will attract small or retail investors to invest.

Increase in free-floating shares

As the outstanding shares of the company rise which in turn leads to an increase in the free-float shares in the secondary market.

Alternative for dividend

A company can easily issue bonus shares when they are running out of cash and also save on the tax at the time of payment for the dividend.

Who Is Eligible for Bonus Shares?

So, are you eligible for the upcoming shares on the bonus shares list in 2022, or the companies likely to declare bonus shares in 2022. The eligibility will depend on the record date and ex-date of the shareholder. An ex-date is a date before the record date fixed by the company. All shareholders before the record and ex-date are eligible for the bonus shares. The current equity delivery cycle in India is T+2 days. However, the investors should have to be the shareholder of the company one day before the ex-date because it will take two days for bonus shares to get credited to the Demat account.

Upcoming Bonus and Split Shares (On or After 30 November 2022)

Both are important and effective corporate actions to attract investors by increasing the number of outstanding shares (bonus shares) and reducing the share price (split shares). The existing shareholders will get the benefits of increasing the number of shares held by them without paying any extra cost. But the major difference between a bonus issue and a stock split or split share is that in a bonus issue, the company issues new shares in the market whereas in split shares the existing shares are split. 

Precision Wires India Limited

• Industry: Manufacture of industrial products such as aluminum, zinc, and copper products
• Precision Wires India Limited has announced a 1:2 bonus issue. 
• The ex-date for the issue is 22 Dec 2022. 
• The record date is 22 Dec 2022.
• Market Capitalization of the company: ₹ 1,262 crores.
• Date of Listing: 06 Sep 1995

BLS International Services Limited

• Industry: Leisure services and provides tour travel-related services.
• BLS International Services Limited has announced a 1:1 bonus issue. 
• The ex-date for the issue is 8 Dec 2022. 
• The record date is 10 Dec 2022.
• Market Capitalization of the company: ₹ 7,661 crores.
• Date of Listing: 14 Jun 2016 

Upcoming Split Shares in India (On or After 30 November 2022)

Rajnandini Metal Limited

• Industry: Manufacture of industrial products such as aluminum, zinc, and copper products
• Rajnandini Metal Limited has announced a stock split from ₹ 10/- to  ₹ 1/-.
• The ex-date for the issue is 30 Nov 2022. 
• The record date is 30 Nov 2022. 
• Market Capitalization of the company: ₹ 88 crores.
• Listed on: Only NSE

Chandra Prabhu International Limited

• Industry: Trading of coal and importing petrochemical products in India
• Chandra Prabhu International Limited has announced a stock split from ₹ 10/- to  ₹ 2/-.
• The ex-date for the issue is 30 Nov 2022. 
• The record date is 30 Nov 2022. 
• Market Capitalization of the company: ₹ 12 crores.
• Listed on: Only BSE

Likhitha Infrastructure Limited 

• Industry: Civil Construction
• Likhitha Infrastructure Limited has announced a stock split from ₹ 10/- to  ₹ 5/-.
• The ex-date for the issue is 2 Dec 2022. 
• The record date is 2 Dec 2022. 
• Market Capitalization of the company: ₹ 926 crores.
• Date of Listing: 15 Oct 2020 

Mefcom Capital Markets Limited

• Industry: Finance and Capital Market
• Mefcom Capital Markets Limited has announced a stock split from ₹ 10/- to  ₹ 2/-.
• The ex-date for the issue is 2 Dec 2022. 
• The record date is 2 Dec 2022. 
• Market Capitalization of the company: ₹128 crores.
• Listed on: Only BSE 

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns

Conclusion

There are not many disadvantages for the investors while receiving bonus shares but it should be kept in mind that though profit will remain the same but EPS will fall. If the company keeps on issuing bonus shares, then the cost of these shares will rise and the ability to raise money will fall in the future as there is no cash received on it by the shareholders. Despite the minor disadvantages, it is worthwhile to check which companies give bonus shares in the upcoming financial year.

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.