Bonus Shares: Everything You Need to Know

Bonus shares are a way for companies to reward their shareholders without having to pay out cash dividends. Companies can issue bonus shares to shareholders as a way to increase the value of their shares.

Bonus shares are usually issued in proportion to the number of shares already owned by each shareholder. For example, if a company issues one bonus share for every existing share, a shareholder who owns 100 shares will receive 100 bonus shares.

The main benefit of bonus shares is that they increase the value of each existing share, without requiring the company to pay out any cash. This can be a great way for companies to reward their shareholders without putting a strain on their finances.

Bonus shares are a way for companies to reward their shareholders without paying cash dividends. They're essentially free shares given to existing shareholders, increasing the total number of outstanding shares.

Companies can issue bonus shares to encourage retail participation, making their shares more affordable and easier to trade for individual investors. This is because a lower stock price means investors can buy more units, and increased liquidity reduces the costs associated with buying and selling shares.

A company that issues bonus shares demonstrates its financial health and ability to reward shareholders. This can signal to investors that the company is in a good position to continue growing and adding value.

Bonus shares are also more favorable from a tax perspective, as they're not taxed when issued. However, investors will still need to pay capital gains tax if they sell their bonus shares for a profit.

To be eligible for bonus shares, you need to own shares of the company before the record date and ex-date set by the company. This is usually two days ahead of the record date, and buying shares on the ex-date won't give you ownership by the record date.

Shareholders who own shares before the record date are eligible for bonus shares. The company will credit the bonus shares to your account within 15 days of allotting a new ISIN.

The benefits of issuing bonus shares include increasing the company's market capitalization, making it more attractive to potential investors. However, this can also lead to a decrease in earnings-per-share, which might deter some investors.

Bonus shares can increase the liquidity of the stock, making it easier for shareholders to buy and sell their shares. This can also make the stock more attractive to retail investors who might find it more affordable.

Here are the key benefits of issuing bonus shares:

There are two main types of bonus shares: Fully Paid Bonus Shares and Partly-Paid Up Bonus Shares. Fully Paid Bonus Shares are given to shareholders at no extra cost based on their existing holdings in the company.

Fully Paid Bonus Shares are issued from sources such as the profit and loss account, capital reserves, capital redemption reserves, and the security premium account.

Partly-Paid Up Bonus Shares are a bit more complex, as they originate from partly-paid shares. These are shares where the investor has only paid part of the full issue price, with the remaining amount to be paid later in instalments.

Here are the main sources for issuing Fully Paid Bonus Shares:

Partly-Paid Up Bonus Shares, on the other hand, cannot be issued from the capital redemption reserve account or the security premium account.

To be eligible for bonus shares, you must own shares of the company before the record date and the ex-date set by the company.

The ex-date is typically two days ahead of the record date, and shares must be bought before the ex-date to be eligible for the bonus shares.

If you purchase shares on the ex-date, you won't be credited with ownership of the shares by the record date, and therefore, you won't be eligible for the bonus shares.

Bonus shares are credited to shareholders' accounts within fifteen days of a new ISIN being allotted for the bonus shares.

You must own shares before the ex-date to receive the bonus shares, as buying shares on the ex-date won't give you ownership by the record date.

Issuing bonus shares can have several benefits for both companies and investors. Companies can use bonus shares as an alternative to paying dividends, which can be beneficial for those with irregular profits.

One of the main advantages of bonus shares is that they can increase participation among retail investors by making the stock more affordable and liquid. This is because the number of outstanding shares increases, which can lower the stock price and make it easier to trade.

Bonus shares also allow shareholders to diversify more, especially if the price per stock is too high for a retail investor. This can be beneficial for those who want to spread their investments across different companies.

A bonus issue can also increase the company's issued share capital, making it look like an attractive option to investors. This can be beneficial for companies that want to attract more investors and increase their market capitalization.

In terms of tax implications, bonus shares are not taxed when issued, making them more favorable than a cash dividend from a taxation perspective. However, investors are still required to pay capital gains tax on bonus shares if selling them for a net gain.

Here are some key benefits of issuing bonus shares:

By issuing bonus shares, companies can demonstrate their financial health and commitment to shareholders, which can be beneficial for both the company and its investors.

Companies issue bonus shares to make their stock more attractive for retail investors by lowering the price per share and adding liquidity. This makes their shares more affordable and easier to trade.

Bonus shares provide an alternative to issuing a dividend payment for rewarding investors, especially for smaller companies that don't have consistent earnings to pay regular dividends.

A company that issues bonus shares demonstrates it has sufficient share reserves and/or profits to reward prospective investors and current shareholders, signaling a financially sound position to keep growing and adding shareholder value.

Bonus shares aren't taxed when issued, making them more favorable than a cash dividend from a taxation perspective. However, investors are still required to pay capital gains tax on bonus shares if selling them for a net gain.

Companies can issue bonus shares through profits or existing share reserves, which doesn't dilute shareholders' equity because it's done in a constant ratio that keeps the relative equity of each shareholder the same.

Bonus shares can have a significant impact on a company's financial health and its relationship with shareholders. A company that issues bonus shares demonstrates that it has sufficient share reserves and/or profits to reward prospective investors and current shareholders.

Investors who receive bonus shares won't be taxed on the issue, but they will still have to pay capital gains tax if they sell the shares for a net profit. This is because the cost base of the bonus shares is usually zero, unless the bonus issue is taxable as a dividend.

Issuing bonus shares can also make a company's shares more affordable and easier to trade for retail investors, increasing liquidity and decreasing the stock price.

The share price impact of a bonus issue is a key consideration for investors. A company's share price will proportionally adjust to the number of bonus shares issued, as seen in a one-for-one bonus issue where the stock price would readjust to $5 to reflect the additional bonus shares.

If a company's stock price was at $10 and it had a one-for-one bonus issue, the stock price would drop to $5. This is because the additional bonus shares increase the outstanding supply of shares, making each share worth less.

A three-for-one bonus issue, for example, would entitle each shareholder three shares for every one they hold before the issue. This means a shareholder with 1,000 shares would receive 3,000 bonus shares.

The share price will adjust accordingly, with each share now worth a fraction of the original price. In the case of a three-for-one bonus issue, the stock price would drop by 75% to reflect the additional bonus shares.

This means that while the number of shares increases, the overall value of the company remains the same. The market capitalization does not increase with a bonus issue, only the number of outstanding shares.

Bonus shares are issued without tax implications, but there's a catch. They aren't taxed when a company issues them.

However, investors must still pay capital gains tax if selling them for a net profit. The cost base of the bonus shares is usually zero, but if the bonus issue is taxable as a dividend, then the cost base is generally the taxed dividend amount, plus any calls on partly paid bonus shares.

The acquisition date is the date of issue, which is important to note when filing a tax return. Investors should inform their accountant if they have received bonus shares to ensure that they are managed correctly from a taxation standpoint.

Companies issuing bonus shares can be a good sign of financial health, but it's essential to understand the tax implications. Investors are still required to pay capital gains tax on bonus shares if selling them for a net gain, making them subject to a tax rate of 10% to 37%.

Before a company issues bonus shares, it must follow certain guidelines. The Articles of Association must sanction a bonus issue, and if not, a special resolution must be passed at the general meeting.

The company must also notify the Reserve Bank and obtain its consent before issuing bonus shares. In addition, the bonus shares must be fully paid, as partially paid shares will make shareholders liable to pay the uncalled amount.

The company must also ensure that the total share capital does not exceed the authorized share capital as a result of the bonus issue. If it does, the capital clause in the Memorandum of Association must be amended by increasing the authorized capital.

To qualify for bonus shares, you must hold the stock before the Ex-Date, also known as the Ex-Bonus Date.

The Ex-Date is the cut-off date when a stock starts trading without the value of the upcoming bonus issue. This date is crucial to note, as purchases made on or after the Ex-Date do not include bonus entitlements.

Companies issue bonus shares at a constant ratio formula, which allows a fixed number of shares to each shareholder based on the number of outstanding shares. This ratio can vary, but it's essential to understand how it works to grasp the concept of bonus shares.

For example, if a company issues bonus shares at a ratio of 4:1, you'll receive four bonus shares for every one share you already own. This means if you hold 200 shares, you'll become entitled to 800 bonus shares.

The total value of your investment remains the same, even if the share price drops. For instance, if the share price was ₹20 per share and you owned 200 shares, your investment was worth ₹4,000. After the bonus issue, the share price might drop to ₹4 per share, but you'll still own 1,000 shares, and the total value of your investment will remain ₹4,000.

Bonus shares are issued to equate the excess of assets over liabilities with the nominal share capital. This means the company can service its larger equity and promote goodwill among shareholders.

Before issuing bonus shares, a company must follow certain guidelines to ensure a smooth process. A bonus issue cannot be sanctioned by the company's Articles of Association, so a special resolution must be passed at the general meeting.

To issue bonus shares, the company must also obtain the consent of the Reserve Bank and notify them before the issue. The company must ensure that the total share capital does not exceed the authorized share capital as a result of the bonus issue.

Bonus shares must be fully paid, and if shares are partially paid, the shareholders will be liable to pay the uncalled amount. The company must follow SEBI-issued guidelines to ensure compliance with regulatory requirements.

The Articles of Association must sanction a bonus issue, and if not, the company must pass a special resolution at the general meeting to approve the issue. The company must also notify the Reserve Bank before issuing bonus shares.

A stock split is a way for companies to increase the number of shares trading in the market without any cost. It involves no change in the company's cash reserve.

A stock split is different from a bonus issue, as it doesn't involve issuing free shares to existing shareholders. Companies use stock splits to increase liquidity, but it doesn't affect the company's market capitalization.

If a company has a stock split, its share price will proportionally adjust to reflect the increased number of shares. For example, if a company's stock price was at $10 and it had a one-for-one stock split, the stock price would readjust to $5.

Stock splits are often compared to bonus issues, but they serve different purposes. Bonus issues are used to reward shareholders and attract further investment, while stock splits are used to increase liquidity.

A company's share price adjusts to the number of bonus shares issued, but it doesn't affect the company's market capitalization. This means that the total value of the company remains the same, but the number of shares increases.

Stock splits are a way for companies to increase the number of shares trading, making them more affordable to retail investors. The number of shares increases, but the investment value remains the same.

Companies typically declare a stock split to infuse additional liquidity into shares. This is done by splitting the existing shares into more shares.

In contrast to bonus shares, stock splits do not increase or decrease a company's cash reserves. The company's share price proportionally adjusts to the number of bonus shares issued.

A stock split is like a new pair of shoes - it doesn't change the value of what you already have, but it makes it easier to trade.