What is Bonus share?

Whenever you invest in the stock of a company in the share market, you get many other benefits including a stake in the company. Such as return on your investment, dividend, stock split etc. Another benefit that we get in return for investing in the share market is bonus shares. Bonus shares means getting some more shares in place of the shares you already have and that too without any extra charge. But here the question arises that what is the benefit to a company by issuing bonus shares and to which investor it issues these shares. Through this article, we have tried to give you answers to all these questions.

What is Bonus share?

Bonus shares means issuing a fixed quantity of shares by a company to its existing investors without any extra charge. Like dividends, bonus shares are issued by a company to give a part of the profit made in the business to its investors. Bonus shares can be given by the company in a situation when it has made a lot of profit in the business but still it is not in a condition to give dividend to the investors. Bonus shares can be issued only by a company and that too when it has considerable cash surplus which has no means of utilizing it for any other purpose.

For example, if a company announces 2:1 bonus shares, then the investor will be issued two extra shares for every one share held. That means, if an investor has 100 shares of the company, then after the bonus share issue, he will have 300 shares.

Types of Bonus Share

There are two types of bonus shares:

• Fully paid bonus shares
• Partly-paid up bonus shares

Fully paid bonus shares: Fully paid, as the name suggests, are shares that are issued by the company to investors without charging any kind of fee. These shares are distributed on the basis of the investor’s holding in the company.

Partly-paid up bonus shares: In partly-paid bonus shares, the investor has to make some payment towards the bonus share issue. Usually, the company declares the percentage of this payment at the time of issuing bonus shares. When the company gives the call, he has to make partial payment and only after that he becomes fully entitled to the bonus shares.
Why does a company issue bonus shares?

To reduce the price of shares: By issuing bonus shares, the price of the company’s existing shares in the market is reduced in the same proportion in which they are issued. When the share price decreases, even small investors are able to trade and invest in it.

To create a good image among the investors: Bonus shares create a positive image of the company among the investors. This shows that due to good business of the company, it has good cashflow and the possibility of getting high returns on the investment made by the investor is also high.

To increase liquidity: Issuing bonus shares increases the number of shares of the company in the market. The greater the number of shares, the greater will be the liquidity, due to which people can trade and invest in them more easily.

To reward investors: Like dividends, bonus shares are given to investors as a reward for their investment. This increases investor confidence in the company.
To whom are bonus shares issued?

Bonus shares are issued to investors who already hold shares of the company on the record date. Apart from the record date, another date called ex-date plays an important role in the entire process of bonus shares. Let us know in detail about both the dates.

Record Date: Record date is a cut off date that the company uses to identify investors who are eligible for bonus shares. If an investor wants to avail the benefit of bonus shares, then the shares of the company should be in his demat account till the record date. Every day in the share market, shares are transferred from one account to another and after the issue of bonus shares, the demand for the company’s stock may increase.

Ex-Date: Ex-Date is the time one or two days before the record date. That means, if you want to avail the benefit of bonus share issue and you do not have shares of the company, then you can buy shares from the market on ex-date. At present there is a settlement cycle of T+1 in India. That means if you have bought the share today, it gets credited in your demat by tomorrow. Similarly, the shares you buy from the market on ex-date get credited to your demat account till the record date.

Effects of issuing bonus shares

Like a stock split, bonus shares have no impact on the value of the investment made by the investor. When bonus shares are issued, the number of shares increases and their market price also decreases accordingly. Because of this, the investment value that was there before the bonus share issue remains the same even after the bonus share issue. Let us understand this with the help of an example:

Suppose Amit has 100 shares of ABC company whose market price is Rs 500. Accordingly, his total investment value was:

Investment Value: 100*500 = 50000

Here if the company declares a bonus of 4:1, meaning it is giving 4 new shares to the investor for every 1 share, then the total shares are:

Number of new shares: 100+400 = 500

If the share number is increased from 100 to 500 then the value of the share will also reduce. In this case:

Price of one share: 500/5 = 100

Investment Value: 500*100 = 50000

It becomes clear from the above example that no matter the quantity of bonus shares issued, it has no impact on the value of the investment. Yes, if the company performs well in the future and the price of shares increases, then the chances of the investor getting more profits increases.

Benefits of Bonus Share

Bonus shares are issued to the investor without any extra charge. That is, unlike ordinary shares, the investor does not have to pay any price in bonus shares.

The investor is not liable to pay any tax on the bonus shares received.

Although bonus shares do not affect the market value of the investment, if the performance of the company is good then the possibility of getting higher returns due to more shares in future also increases.

Bonus share helps in creating a good image of the company among the investors and more people can invest in it to get good returns.

Due to this, the price of the company’s shares becomes lower and the number increases. This promotes liquidity in the market and small investors are also able to buy shares.

Conclusion

Bonus shares are a way for a company to reward its shareholders. If it is not able to give dividend in the form of cash payout, it can choose the method of bonus shares. However, bonus shares can be issued only by a company which has good cash surplus or has earned good profits in the past. The investor wishing to avail the benefit of bonus shares should have the shares in his demat account before the record date. Issuance of bonus shares does not increase the profit of a company in any way but it definitely helps in building its good image in the market.