Bonus Shares

Bonus shares are free additional shares that companies issue to existing shareholders from accumulated reserves instead of paying cash dividends. Shareholders who hold eligible shares on the record date automatically receive bonus shares in the announced ratio.

Key points:

• Bonus shares are issued without any payment from shareholders.
• They are credited directly to the eligible shareholder's Demat account.
• A 1:1 ratio means one additional share for every existing share held.
• A 3:1 ratio means three additional shares for every existing share held.
• Investors must purchase shares before the ex-date to qualify for the bonus issue.
• Bonus shares increase the total number of shares held but do not immediately increase the total value of the investment.

Bonus shares are additional shares that a company issues to its existing shareholders without charging any money. Instead of distributing retained earnings as cash dividends, the company converts part of its reserves into share capital and issues free shares.

The number of bonus shares you receive depends on the announced bonus ratio. For example, under a 1:1 bonus issue, you receive one additional share for every share you already own. If you hold 100 shares, you receive 100 bonus shares, increasing your total holding to 200 shares.

A company's Board of Directors must approve the bonus issue before the shares are allotted. Once approved and after the record date, the bonus shares are credited directly to eligible shareholders' Demat accounts.

Companies generally issue bonus shares in two forms.

Fully paid bonus shares 

Do not require any further payment from shareholders. They are allotted in proportion to the existing shareholding and become fully owned immediately after allotment.

Partially paid bonus shares 

require shareholders to pay the remaining unpaid amount according to the company's terms. Investors should carefully read the issue conditions before accepting such shares.

You can calculate bonus shares by using the announced bonus ratio and your existing shareholding.

Follow these simple steps:

1. Check the announced bonus ratio.
2. Count the number of shares you currently own.
3. Apply the bonus ratio to your existing holding.
4. Add the bonus shares to your original holding.

For example, if you own 100 shares and the company announces a 1:1 bonus issue, you receive 100 additional shares, increasing your total holding to 200 shares.

Similarly, if a company announces a 3:1 bonus issue and you own 100 shares, you receive 300 bonus shares, giving you a total of 400 shares after the allotment.

Bonus shares allow companies to convert their accumulated reserves into share capital instead of distributing cash dividends. They increase the number of shares held by existing shareholders without affecting the company's cash flow or net assets. This helps preserve liquidity while rewarding shareholders.

Some of the key features of bonus shares are:

• Bonus shares are issued free of cost to eligible existing shareholders.
• They are allotted on a pro-rata basis, so the shareholding pattern remains unchanged after the issue.
• The share price generally adjusts downward after the bonus issue, making the stock more affordable for retail investors.
• An increase in the number of outstanding shares can improve liquidity by making the stock easier to trade.
• Bonus shares can generally be issued only after a minimum period of 12 months from the previous bonus issue.
• A company can issue a maximum of two bonus issues within a five-year period, subject to the applicable regulatory requirements.
• Bonus issues can strengthen shareholder confidence by rewarding existing investors without requiring an additional investment.

Companies issue bonus shares to reward shareholders while retaining cash for business operations. A bonus issue also increases the number of shares in circulation, which can improve liquidity and make the stock more accessible to investors.

Some common reasons for issuing bonus shares are:

Only shareholders whose names appear in the company's records on the record date are eligible to receive bonus shares. The shares are credited automatically to eligible investors in proportion to their existing holdings.

To become eligible, you must purchase the shares before the ex-date. Buying shares on or after the ex-date does not qualify you for the announced bonus issue.

Record date vs ex-date

Example:

Suppose a company announces a bonus issue on 5 April and fixes 26 April as the record date. The ex-date becomes 25 April. To qualify for the bonus shares, you must purchase the shares before the ex-date so that your name appears in the company's records on the record date.

Companies issue bonus shares to reward existing shareholders while retaining cash for business operations. A bonus issue also increases the number of outstanding shares, improves liquidity, and provides an alternative to cash dividends.

• Lower the share price: A bonus issue generally reduces the market price per share, making the stock more affordable for a wider range of investors.
• Promote liquidity: An increase in the number of outstanding shares can improve trading activity in the secondary market.
• Encourage retail participation: A lower share price can encourage more retail investors to participate in the company's shares.
• Provide an alternative to dividends: Companies can reward shareholders by issuing bonus shares instead of making cash dividend payments.
• Strengthen the company's reputation: A bonus issue may reflect the company's accumulated reserves and reinforce shareholder confidence in its long-term growth prospects.

Bonus shares offer benefits to both companies and shareholders by increasing shareholding without requiring an additional investment.

For companies

• Preserve cash reserves: Bonus shares reduce the need to distribute cash dividends, helping the company retain funds for future business requirements.
• Strengthen shareholder confidence: Issuing bonus shares can reinforce trust among existing shareholders by rewarding them with additional shares.
• Increase market liquidity: A rise in outstanding shares can improve trading activity and enhance the stock's liquidity in the market.
• Reflect financial strength: A bonus issue may indicate that the company has accumulated sufficient reserves and has maintained stable financial performance.

For investors

• Receive additional shares without making any payment.
• Increase the number of shares held while maintaining the same ownership proportion.
• Benefit from improved liquidity if the increased share count leads to higher trading activity.
• Continue holding the shares for potential long-term capital appreciation.

Although bonus shares increase the number of shares held, they do not immediately increase the total value of an investor's holding. Both companies and investors should understand their limitations.

For investors

• Lower Earnings Per Share (EPS): Increasing the number of outstanding shares may reduce the company's EPS.
• No immediate cash benefit: Unlike dividends, bonus shares do not provide direct cash income.

For companies

• No additional capital raised: Bonus shares are issued from existing reserves and do not generate fresh funds.
• Higher administrative costs: Issuing bonus shares involves regulatory and operational expenses.
• Future capital raising may become more complex: A larger number of outstanding shares can influence future fundraising decisions.

Bonus shares are additional shares issued by a company to its existing shareholders without any extra cost. They are allotted in a predetermined ratio and are credited automatically to eligible shareholders whose names appear in the company's records on the record date. Although bonus shares increase the number of shares you own, they do not immediately change the total value of your investment. Before investing based on a bonus announcement, review the company's financial position, understand the record date and ex-date, and evaluate the investment based on your financial goals rather than the bonus issue alone.