Bonus Shares

What Are Bonus Shares?

Bonus shares are additional shares distributed by a company to its existing shareholders at no extra cost. This means that shareholders receive extra shares in proportion to the number of shares they already own.

For example, suppose a company issues bonus shares in a 2:1 ratio. In that case, shareholders will receive two bonus shares for every share they currently own. This increases the total number of shares held by the shareholders without requiring them to make any additional payment.

Types of Bonus Shares

1. Simple Bonus Shares: These are issued free of charge to existing shareholders in proportion to their current holdings. For example, suppose a company announces a bonus issue of 1:2. In that case, shareholders receive one additional share for every two shares they already own.
2. Capitalized Bonus Shares: These are issued using the company's reserves or profits. This type of bonus share is typically funded from accumulated profits, such as the profit and loss account or capital reserves.
3. Bonus Shares from Share Premium Account: This involves issuing bonus shares through the capitalization of the company's share premium account. This method allows companies to convert the share premium into equity shares without affecting cash flow.

Why Bonus Shares are Issued?

Companies issue bonus shares for several reasons:

• To Enhance Market Perception: By increasing the number of shares outstanding, the price per share typically decreases. This can make the stock appear more affordable to smaller investors, potentially increasing interest and trading volume.
• To Retain Earnings: Instead of distributing profits as cash dividends, companies can convert a portion of their retained earnings into equity by issuing bonus shares. This helps maintain funds for reinvestment in the business.
• To Improve Liquidity: A larger number of shares in the market can increase trading activity, leading to better liquidity. This means investors can buy or sell shares more easily without significantly impacting the price.

How Bonus Shares Work?

Bonus shares are add-on shares given to you at no additional cost. They are a reward for existing shareholders who boost the liquidity of their stock. The issuance of bonus shares signals that a company is performing well and is confident about its future growth.

Many companies have announced plans to issue bonus shares in India in 2024. Shareholders can look forward to benefiting from these bonus share offerings, which can enhance their overall holdings and represent the company's confidence in its future performance.

If you are interested in upcoming bonus shares, refer to the INDmoney bonus shares list.

What are the Benefits of Bonus Shares?

The benefits of bonus shares are:

• It increases the total number of shares you own
• You don't have to pay anything extra for bonus shares
• It can make the shares more attractive if you are a new investor, as it shows that the company is doing well
• Bonus shares don't have any tax implications when they are issued
• It doesn't reduce the value of your existing shares

Taxation on Bonus Shares

When companies give bonus shares to their shareholders, it's important to know that these bonus shares are exempt from taxes. But if you decide to sell them later, you might have to pay capital gains tax on any profit you make from selling them.