What Do You Mean by Bonus Shares: Its Advantages to Investors

Introduction

It is a fundamental truth that a bonus of any kind sounds appealing and so is the case in the world of investing. If you have been around in the investing business for at least a year, it is very likely that you have received an email with a subject line as ‘issuing bonus shares'. While the topic is not complicated the misconceptions around it make it germane to our discussion. 

Now, it is not new information for the Investors in the equity market that they enjoy many perks such as dividends, right issue, capital appreciation, and of course our subject matter-the bonus issue. However, it is vital for retail investors to understand the nuts and bolts of the topic so as to maximize the benefits that come with delving into an equity market. Therefore let us, straight dive, into the topic.

Summary in Brief:

• What is a bonus share?
• Regulations of bonus shares
• Types of bonus shares
• What are the advantages of bonus shares to the investors?
• List of Companies currently offering Bonus Shares in India..
• FAQs

What is a Bonus Share?

In layman's terms, bonus shares are an additional number of shares that are given by companies to their existing shareholders. These are often issued as “BONUS” when these companies are not in the position to pay off dividends to their shareholders. This may happen despite the fact that they have earned decent profits for that quarter, as a matter of retained earnings. 

It is important to note that as per the rules of the companies Act 2013, only a company has the right to issue bonus shares to its shareholders. These are generally companies that have earned massive profits or have large free reserves. While shareholders to meet their liquidity requirements can easily transact these shares in the secondary market through their demat account 

Well to the ones who are curious about the motive of the company to issue bonus shares, what happens is that when a company utilizes the profits or reserves to issue bonus shares, these are converted into share capital, hence there is a ‘capitalisation’ of the profits. This increases the per capita of the company and makes them look pretty rewarding in front of its investors.

Regulations of Bonus Shares:

Bonus shares of listed companies are regulated by the Securities Exchange  Board of India and the companies Act 2013. Let us look at the important terms related to the bonus shares. 

Record Date

The record date in terms of bonus shares means the cut-off date declared by the company for being eligible for the bonus shares. All the existing shareholders who hold the shares of the company as of the record date in their demat account become entitled to receive bonus shares from that company.

Ex-Date

The ex-date as the name suggests is just a day before the record date. In this, an existing investor must make sure that he buys the shares of the company at least one day prior to the ex-date so as to become eligible for the bonus shares.

How are bonus shares issued?

Bonus shares are issued in ratio of the existing shares held by the investors. For eg: If a company X declares one bonus share for an existing share, it implies that an existing shareholder is eligible to receive one additional share for his one existing share. i.e. the ratio of 1:1.

To understand clearly. Assume that a shareholder Mohan holds 2,000 shares of the company X. Now when this company issues bonus shares, he shall receive another 2000 bonus shares, i.e. (2000 *1/1 = 2,000). Companies usually go for the standard 1:1 ratio. However recently a number of companies have issued bonus shares even in the ratio of 4:1 i.e. 4 shares for each existing share

Who is Eligible for Bonus Shares?

Now, the shareholders who manage to own the shares of the provider company before the record date and the ex-date as declared by the company shall become eligible for bonus shares. In the Indian stock market, the principle of the T+2 rolling system is followed for the delivery of shares. Here the ex-date is two days prior to the record date. This means that the shares must be bought before the ex-date for an investor to be credited with the ownership of given shares.

After the shareholder has obtained the required shares, a new ISIN (International Securities Identification Number) is allotted for the bonus shares, the bonus shares are then credited to the shareholders’ accounts within a time frame of 15 days.

How are Bonus Shares Credited?

This part of the bonus shares is not any different from the ordinary shares. These are also credited to the existing shareholders’ demat account.  As mentioned, the process usually takes 10-15 days.

Types Of Bonus Shares

Just like ordinary equity shares, bonus shares can be divided into fully paid-up bonus shares and partly paid-up bonus shares. Fully paid-up shares are the shares in which the amount is equal to the asked price of the share by the company. These are re-distributed at almost no extra cost in proportion to the investors holding in the company. While partly paid-up shares are paid in installments by the shareholders as called by the company. However, in India as far as a practical approach is concerned, partly paid-up shares have not come into play. 

What are the advantages of bonus shares to the investors?

When it comes to benefits, the bonus shares carry all the perks of the ordinary shares themselves. Let us give an eye to the same:

• While considering the purview of the market, bonus shares provide additional income to shareholders. These shares serve as compensation for the shareholders. 
• Further, these bonus shares in the market are generally lower than the price per share, hence making them lucrative as well as affordable to the investors.
• Also, considering other reaping financial rewards, the investors do not have to pay taxes while they receive bonus shares from the company.
•  Bonus shares are highly creditable for long-term shareholders of the company who are looking to multiply their investment.
• These Bonus shares are free of cost to shareholders as they are issued by the company, and as the opportunity suggests it increases the outstanding shares of an investor in the company as well as enhances the liquidity of the shares held.

What are the disadvantages of bonus shares to the investors?

Issuing bonus shares is a disadvantage to companies on many fronts as bonus shares do not produce any extra cash or income for the company concerned. Let's look at how it is a disadvantage for investors as well.

• Issuing bonus shares do not increase the overall profits earned, as a result, profits remain the same while the number of shares increases. This further implies that the earnings per share that investors receive shall decrease.

List of Companies currently offering Bonus Shares in India.

By now you must have gauged the technical know-how of the bonus shares issued by a company, it is equally important to keep an eye on the companies offering these bonus shares during the year. Let us look at some of the active companies offering bonus shares currently. 

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

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. 

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