Bonus Share Basics: Purpose, Benefits, and Process

Bonus share basics are a way for companies to reward shareholders with extra shares, but what's the purpose behind it? The main goal is to increase shareholder value by giving existing investors more shares in the company.

This can be a great way for investors to benefit, as it increases their ownership stake in the company without having to pay for the new shares. For example, if you own 100 shares and receive 10 bonus shares, your total ownership stake increases to 110 shares.

Bonus shares can also have a positive impact on the company's stock price, as the increased number of shares can make the stock appear more attractive to potential investors. This can lead to an increase in demand and a rise in the stock price.

To receive bonus shares, investors typically need to be registered shareholders or have a brokerage account with the issuing company.

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A bonus share is the process by which a company distributes extra shares to its shareholders based on their existing holdings, without requiring them to make any additional payment.

This allocation preserves the proportion of ownership each shareholder holds, rewarding them for their investment and confidence in the company.

Bonus shares are sometimes referred to as scrip issues or capitalization issues, and are a way for businesses to give out extra shares to their current shareholders without any money expense.

The starting point for a bonus issue is when a company decides to capitalize its reserves and transform them into issued share capital.

The bonus issue ratio, such as 1:2, is suggested by the board of directors, meaning that each shareholder gets one extra share for every two shares they already have in possession.

The company then updates its share capital in records, showing more shares due to the bonus issue, and adds new shares into the shareholders' demat accounts, completing the process.

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Companies issue bonus shares for a variety of reasons, and it's not just about rewarding their shareholders. One of the main advantages is that it allows them to increase liquidity without affecting their cash reserves.

By issuing bonus shares, companies can grant stock options at a more manageable price, aligning with regulatory requirements that prohibit fragmented shares. This is especially useful for companies with strong cash reserves.

Bonus shares can also serve as a protective measure for existing shareholders, ensuring their ownership percentage remains stable even when new shares are issued. This is a key benefit for companies looking to maintain shareholder trust.

Issuing bonus shares before an IPO can make the company appear larger and more appealing to investors, potentially leading to better returns post-listing. It's a strategic move that can pay off in the long run.

Here are some of the key reasons why companies issue bonus shares:

By increasing the share capital, bonus issues can facilitate various corporate restructuring activities, capitalizing on accumulated profits. This is a key benefit for companies looking to restructure their operations.

Bonus shares can also increase accessibility, as they lower the price per share and may draw in a wider spectrum of investors. This is especially useful for companies looking to expand their investor base.

Overall, issuing bonus shares can be a smart move for companies looking to boost liquidity, maintain shareholder trust, and attract new investors.

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Issuing bonus shares is a process that requires careful planning and adherence to certain rules. Companies must settle all outstanding obligations and statutory dues before proceeding.

To determine the number of bonus shares to issue, companies must decide on a ratio, such as how many bonus shares to issue per existing share. This ratio is crucial in ensuring that shareholders receive the correct number of new shares.

Companies must also obtain necessary approvals from key investors and ensure that the bonus issue does not exceed authorized share capital. This is done by reviewing capital limits.

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Here's a step-by-step breakdown of the process:

The book closure date is also an important aspect of the bonus share process, as it temporarily closes fresh transfers of stock. This date is announced by the company and is crucial in ensuring a smooth bonus share issuance process.

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Receiving bonus shares is a great way to boost your investment without spending a dime, but it's essential to understand the tax implications involved.

Bonus shares are not taxed upon receipt, but capital gains tax may apply when they're sold, depending on the sale price and holding period.

The cost basis of the original shares is averaged with the bonus shares, which affects the capital gains tax calculation. For example, if a shareholder initially buys shares at $100 each and receives bonus shares, the cost basis is adjusted across all shares.

Tax regulations vary by country, but in some jurisdictions, receiving bonus shares doesn't create a tax event, while the lowered cost basis could lead to higher capital gains taxes later.

In places where the tax on dividends is higher than that on capital gains, giving bonus shares can be a method to boost assets in a way that minimizes tax, as these shares are not taxed until they are sold.

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Receiving bonus shares doesn't trigger an immediate tax liability, as they are not considered income. However, tax consequences come into play upon their sale, particularly in terms of capital gains tax.

The cost basis of the original shares is averaged with the bonus shares, which affects the capital gains tax calculation. This is because the new cost basis per share becomes lower, potentially leading to higher capital gains taxes later.

Tax regulations vary by country, but in some jurisdictions, receiving bonus shares doesn't create a tax event. However, the lowered cost basis could lead to higher capital gains taxes later due to the larger difference between the sale price and adjusted cost basis.

The holding period of bonus shares often aligns with that of the original shares, influencing whether the gains are classified as short-term or long-term. This can significantly affect the tax rate applied, making it essential to consult with tax professionals to fully understand the implications.

In some cases, receiving bonus shares can be a method to boost assets in a way that minimizes tax, especially in places where the tax on dividends is higher than that on capital gains.

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Issuing bonus shares can be a great way for companies to reward their shareholders, improve their financial situation, and support strategic expansion without using up all available cash.

Bonus shares are essentially free, as existing shareholders receive additional shares without needing to invest more money.

This method rewards long-time shareholders, who receive bonus shares according to the quantity of shares they already hold.

The issuance of bonus shares can also enhance market liquidity, making it simpler for shareholders to trade their shares without greatly influencing the share's value.

By providing bonus shares, companies can boost shareholder trust and loyalty, as it signals to them that the company has had a financially successful period and is willing to share its prosperity.

Bonus shares can also have tax advantages for investors, as they are not taxed until they are sold, potentially minimizing tax liabilities.

In some cases, the tax on dividends is higher than that on capital gains, making bonus shares a beneficial way to boost assets while minimizing tax.

As a result, bonus shares can be a valuable tool for companies to reward their shareholders and support their growth, while also providing potential tax benefits and enhancing market liquidity.

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Bonus shares can be a great way for companies to reward their shareholders, but like any financial decision, it's not without its pros and cons.

Issuing bonus shares can be a cost-effective way for companies to expand their share capital without incurring extra cash outflows.

One of the main advantages of bonus shares is that they can increase the liquidity of a company's shares, making it easier for investors to buy and sell them.

Bonus shares can also be a good alternative to paying dividends, especially for companies that are cash-strapped.

Investors receive additional shares without any cash outflow, which can be advantageous for those seeking to increase their stake in the company without investing more money.

However, issuing bonus shares can also reduce the earnings per share (EPS) for current shareholders, as the company's earnings are spread over a greater number of shares.

The issuance of bonus shares might have tax advantages for investors compared to receiving cash dividends, as they may defer taxes until they sell their shares.

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Bonus shares can also enhance market liquidity, making it simpler for shareholders to trade their shares without greatly influencing the share's value.

In places where the tax on dividends is higher than that on capital gains, giving bonus shares can be a method to boost assets in a way that minimizes tax.

Here are some key advantages and disadvantages of bonus shares:

Overall, bonus shares can be a win-win for companies and investors, but it's essential to consider the potential drawbacks before making a decision.

Bonus shares can have a significant impact on stock prices, but it's not always straightforward. Bonus issues increase the total number of shares in circulation, potentially boosting stock liquidity.

The issuance of bonus shares maintains the company's total earnings but reduces earnings per share, which can lead to a decrease in stock prices. This dilution can make investors perceive the company as less profitable.

In 2020, Apple's four-for-one bonus issue resulted in heightened demand for Apple shares and an increase in stock prices. However, in 2018, Reliance Industries' bonus issue led to a temporary stock price dip due to earnings dilution.

The record date is a cut-off date set by a company to identify eligible shareholders who can receive a distribution. Investors must be owners of shares in the company by this date to qualify.

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Bonus issues can increase stock liquidity, potentially boosting demand and influencing the stock price.

However, the issuance of bonus shares can lead to earnings dilution, reducing earnings per share and potentially causing a decrease in stock prices.

Investors might perceive a company as less profitable after a bonus issue, especially if they expect future earnings to remain the same.

In 2020, Apple's four-for-one bonus issue resulted in heightened demand and an increase in stock prices, but it's not always a straightforward impact.

Bonus issues can also affect dividend payouts, with a decrease in dividend per share due to an increase in outstanding shares.

However, if future earnings are anticipated to rise, the reduction in dividends may only be temporary.

Stock splits, on the other hand, divide existing shares into multiple ones to make them more affordable for a wider group of investors.

Unlike bonus shares, stock splits don't increase share capital, but rather create smaller units of the current capital.

The goal of boosting market liquidity is shared by both bonus shares and stock splits, but they give different signals to the market.

Bonus shares are generally seen positively by the market, signaling profitability and reinforcing investor loyalty, while stock splits usually give neutral signals.

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The record date is a cut-off date set by a company to identify eligible shareholders who will receive a distribution.

This date is crucial because investors must be owners of shares in the company by this date to qualify for the distribution.

Investors who buy the stock after the record date won't be eligible to receive the distribution.

In India, the ex-date is two business days prior to the record date, making it even more important to be aware of these dates.

The record date is established so that a company can send distributions to the correct shareholders, ensuring everyone gets what they're entitled to.

Bonus shares, which raise no money as they're offered as additional shares, also have a record date, making this concept applicable to various types of distributions.

Bonus shares and stock splits may seem similar, but they have distinct differences. A stock split divides existing shares into smaller denominations, altering their face value but not the total value of an investment. This means that the total investment value remains unchanged, but the number of shares increases. The ownership percentage remains the same because the total market capitalization and the shareholder's proportional ownership do not change.

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In contrast, bonus shares add new shares to existing holdings without changing the share's face value or the shareholder's relative ownership percentage. This means that the total number of shares increases, but so does the total market capitalization, so the shareholder's percentage ownership remains constant.

Here's a key difference between bonus shares and stock splits:

In summary, while both bonus shares and stock splits aim to increase liquidity and make shares more affordable, they achieve this in different ways and send different signals to the market.

A stock split is a way for a company to increase the number of shares outstanding, making each share more affordable and attractive to investors. This can be done by dividing existing shares into multiple shares.

Stock splits are typically done to make the stock more appealing to small investors and to increase trading volume. For example, a company might split its stock 2-for-1, meaning that each shareholder receives two new shares for every one they already own.

A stock split is not the same as a stock dividend, which is a payment made to shareholders from a company's profits. Stock dividends are not a way to increase the number of shares outstanding, but rather a way for companies to reward their shareholders.

Stock splits can have a positive impact on a company's stock price, as it can increase the number of shares available for trading, which can lead to increased liquidity and trading volume. This can make the stock more attractive to investors and potentially increase its value.

In some cases, a company may choose to do a reverse stock split, which is the opposite of a stock split. This is done when a company's stock price is very low and the company wants to make the stock more attractive to investors by reducing the number of shares outstanding.

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Stock splits are a way for companies to increase the number of shares trading in the market, but they don't involve any cost, leaving the company's cash reserve intact.

A 1:10 stock split, for example, means a shareholder with one INR 100 share ends up with ten INR 10 shares, without changing the total investment value or the shareholder's proportional ownership.

Stock splits are often used to make shares more affordable for a wider group of investors, and the trading price decreases accordingly.

Here's a comparison between stock splits and bonus shares:

In contrast, bonus shares are new shares that a company gives to its existing shareholders for free, in proportion to their current holdings, which increases the company's share capital but not its market capitalization.