Let us learn what do you mean by bonus share in India and Why do companies give bonus shares?.
Bonus shares are a free share of stock given to existing shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Though the total number of issued shares increases, the ratio of the number of shares held by each shareholder remains constant.
The bonus shares are also known as a bonus issue of shares.
Let us now learn why do companies give bonus shares?
Bonus issue of shares is given to existing shareholders when companies are short of cash and shareholders expect a regular income.
In such a situation, the company issues bonus shares to its existing shareholders instead of paying dividends, and shareholders may sell the bonus shares and meet their liquidity needs.
These shares may also be issued to restructure company reserves. Normally, It increases the company’s share capital, not net assets.
When the company issues bonus shares, the term “Record Date and Ex-Bonus Date” is used along with it. Let us learn what do you mean by these dates in India?
- Record Date
The record date of the bonus share is a cutoff date set by the company. However, the investors must be shareholders of the company before this date for them to be eligible to receive a bonus share issue.
In other words, the record date is set by the company so that they can find the eligible shareholders and distribute bonus shares to them.
- Ex-Bonus Date
The ex-bonus date is a day preceding the record date set by the company.
The delivery of shares into an account takes place over two days from the trading date in India.
All current shareholders before the ex-bonus date and record date are qualified to receive bonus shares issued by a company.
Though, to qualify to receive bonus shares, the company stocks must be bought before the ex-date.
In such a situation, if the record date is 16th June and the ex-bonus date is 15th June.
Case-1- If you buy shares on 14th June, it will reflect in your account on 16th June and you will be eligible for a bonus on those shares.
Case-2- if you buy shares on 15th June, it will reflect in your account on 17th June, and since the record date is 16th June so you will not be eligible for a Bonus.
One question that comes to your mind when you think of bonus shares is- “How is Ex Bonus Price Calculated?“
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How is Ex-Bonus Price Calculated?
The bonus issue of shares is given to the existing shareholders, according to their existing stake in the company.
For instance, say a shareholder owns 100 shares of a company ABC.
Now the company has decided to issue bonus shares in the ratio of 2:1, i.e. the shareholder gets two bonus shares for each share he/she owns.
As an outcome, the shareholder shall now have 200 bonus shares for the 100 shares owned.
After a bonus issue in India, more shares will be introduced into the stock market and the share price should drop consequently. For instance, in a situation of 1 bonus share for every 10 existing shares, the share price should drop 10% on the Ex-Bonus date.
As an investor, you must understand the tax implications of a bonus issue.
According to the Income Tax Act, 1961, There are no tax implications on a bonus issue of shares for shareholders of the specific financial year.
In another word, you don’t have to pay taxes for receiving the bonus shares. Though, the gains, if any, made for trading in the additional shares are categorized as capital gains, and taxed, therefore.
In this paragraph, I’m going to discuss a few advantages of bonus shares.
Firstly, the bonus shares are beneficial for the long-term shareholders of the company, who want to increase their investment without paying any tax on bonus shares.
Secondly, when the company makes massive profits, its stock prices go up. As an outcome, the bonus shares fetch attractive profits to its shareholders when transacted in the secondary markets for liquidity.
Thirdly, and most importantly, when the company declares a dividend in the future, the investor will get a higher dividend since now he/she holds the largest number of shares in the company due to bonus shares.
Moreover, It’s given a positive sign to the market that the company is committed to the long-term growth story.
In conclusion, since there are many advantages of bonus shares, let us now learn the disadvantages of bonus shares.
It decreases the future earnings per share and the dividend yield ratio of the company. i.e. the bonus issue reduces the share price in the market.
Though, it should be noted that the declaration of Bonus issue in lieu of dividends is not made.
Now, a couple of questions that come to your mind – “Is Bonus Issue the same as the Right Issue, and what is the difference between bonus share and stock split?“
Is Bonus Issue the Same as Right Issue?
No. The Right Issues refer to those shares that a company offers to its existing shareholders at a discounted price. The shareholders have the right to fully/partially accept or ignore the offer and also there are minimum criteria for subscriptions of the share if the shareholder accepts the proposal. Such issuance of shares is known as Right issues and such share is known as Right Shares.
On the other side, bonus shares refer to the shares which are issued free of cost to their shareholders on a specified date (i.e. record date) by the companies.
The major difference between a bonus and a split is the face value of the share. In bonus shares, as discussed, there is no modification in the face value. However, in the case of stock splits, the face value reduces in proportion to split the ratio.
The bonus shares are free and you do not need to take any action. It is generally a positive thing so don’t fret about it.
The share price will decrease after the bonus issue. However, Kindly do not think that you have lost funds.
You got more shares in return. Therefore, your investment is still worth the same amount.