What are Bonus Shares: Meaning, Types & Advantages

September 2020

After announcing a bonus share, the company announces the record date. It is the date at which records are checked to determine the eligible shareholders. An investor would buy the shares in a company knowing that the company has announced a bonus issue to its existing shareholders. Once the shares become ex-bonus (see above) the original shares would be sold. The Group distributes a portion of its retained earnings (past undistributed net profit) via this method. Recently, Bharat Electronics Limited (BEL) issued bonus shares.

• This means that in order to be eligible for the bonus issue you had to buy shares of Nykaa by Nov. 9 to get a delivery in two trading days, i.e., by Nov. 11, 2022, which was the record date.
• It usually takes 15 days from the record date for the Bonus shares to be credited to your demat account, but this depends on the registrar and share transfer agent (RTA).
• A stock split is another corporate action by which a company increases the number of outstanding shares trading in the market.
• These shares are given on the basis of the number of shares the investor already holds.
• If sold after holding for more than a year, they are subjected to long-term capital gains tax.

The market price of shares adjusts in the same ratio in which the bonus shares are allotted. It reduces the price per share, making retail participation easier and increasing its liquidity. Hence, after a bonus issue, the total number of shares increases with a constant ratio of the number eligibility for bonus shares of shares held to the number of shares outstanding. The remaining amount can be repaid in instalments when the company makes a call. When the bonus is applied on partly paid shares, and they get converted into fully paid shares, they become known as partly-paid up bonus shares.

How is a bonus issue different from stock split?

They are provided based on already existing shares of the shareholders. The company’s existing shareholders are not required to pay anything to get bonus shares. The value of shares of a company decreases in the market whenever a bonus share is issued. Companies primarily issue bonus shares when they cannot pay cash dividends to shareholders due to a shortage of funds, even when they earn profits. Hence, investors are offered bonus shares free of cost instead of receiving cash dividends.

In sum, in order to be eligible for a bonus issue, you need to hold the shares on the record date. If you don’t own the shares already, you can buy the shares before the ex-bonus date if you want to participate in the bonus issue. For instance, recently, Nykaa declared a bonus with the record date as Nov. 11, 2022 and the ex-bonus date as Nov 10, 2022. This means that in order to be eligible for the bonus issue you had to buy shares of Nykaa by Nov. 9 to get a delivery in two trading days, i.e., by Nov. 11, 2022, which was the record date. As with all investment instruments, bonus shares have certain tax implications and are subject to various legal aspects.

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An example, for illustration purposes, could be stocks of Wipro and MRF Ltd. One thing to note here is that the company’s equity share capital remains unchanged while the number of outstanding shares increases. If a company has issued any redeemable preference shares, it must transfer an amount equal to the face value of these shares to the capital redemption reserve account from its profits. The premium component of shares issued is credited to the securities premium account. When making the bonus issue, the securities premium account is debited, and the share capital account is credited. From the Company’s point of view, there is one advantage that the Bonus shares do not result in cash flow, i.e. the company’s resources remain intact.

Eligible shareholders and investors shall receive dividends or bonus shares from the company on the announced record date. The ex-date precedes the record, and one needs to pay shares before this date to be eligible for bonus shares as it takes time to get delivery of shares. The bonus issue of shares is known by many names – bonus issue, scrip issue, and capitalisation issue. Bonus issue is a term used for the issue of free shares by companies to existing shareholders instead of cash dividends. The bonus issue of shares improves company credibility and increases the company’s share capital without increasing its net assets.

Issuance Criteria: How Companies Offer Bonus Shares

These shares are sold on the market by the account holders (Air Liquide for direct registered shares, or your financial institution for intermediary registered and bearer shares). The result of this sale will define the average unit selling price of the shares sold. It is based on this average unit selling price that the fractional shares will be paid out in the second half of June 2022 following the rules described below. If these conditions are met, the shares you hold are eligible for the loyalty bonus which are applied to them without any action on your part. In particular, you benefit from a +10% bonus on the number of free shares allocated at the time of their distribution.

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To be eligible for the bonus issue, investors must buy shares before the ex-date. It is because the T+2 settlement cycle is followed in India for the delivery of shares. If the shares are bought on or after the ex-date, they will not be credited into demat account by the set record date and buyers will not be eligible for the bonus shares. A. When companies issue additional shares to existing shareholders free of cost, they are known as bonus shares.

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There are mainly two types of bonus shares – fully paid bonus shares and partly paid bonus shares. Before bonus shares are credited to the shareholder's demat account, their holdings in Kite/Console may display an artificial drop in P&L. Once the bonus shares are credited to the demat account, the P&L will be restored to its correct value.

If authorized by the company’s articles of association, it may capitalize profits by issuing fully paid bonus shares to its members. In this way, it can transfer the amount capitalized from the reserve account to the share capital account. Bonus shares represent a significant aspect of stock market dynamics, serving as a powerful tool for companies to reward their shareholders and strengthen their financial positions. While they may not increase the immediate monetary value of an investment, they bring several strategic benefits, both for investors and companies. As an investor, understanding the concept of bonus shares, their types, advantages, and tax implications is essential for effective financial planning and decision-making. Download a user-friendly and simple AsthaFlow app and start your investing journey.

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In the past, he has worked with Larsen and Toubro Limited, Telco Dealers Leasing and Finance Limited, IIT Capital Services Limited and Premchand Group. Now let us understand the tax implication and how investors were using this to their advantage. No, it might have chosen to reinvest reserves, i.e., retained earnings and plough them into new projects, investments, acquisitions, etc.

If you want to participate in a bonus issue, your goal should be to have the stock as part of your demat account holdings on the record date. For illustration, if the settlement cycle is T+2 days, you’ll have to buy the stock a minimum of one day before the ex-date, for it to reach your demat account on record date. If a company plans to issue bonus shares to non-resident shareholders, it must ensure that the resultant shareholding after issuance of these shares are within the sectoral limits. Essentially, it’s when a company gives out extra shares to its current shareholders. It’s a way for companies to show appreciation to their shareholders. Any current shareholder of a company as of the date of announcement can receive bonus shares.

This is achieved by capitalizing on the company’s accumulated earnings and converting a portion of its free reserves into share capital. Consequently, the company’s share capital increases while the overall value of the investment remains unchanged. Bonus shares are additional shares issued to existing shareholders of a company, usually at zero additional cost. The number of bonus shares issued depends on the number of shares a shareholder owns.

Easy Trip’s focused, capital-light, low-cost, and no-frills approach sets it apart from rest of the online travel agency business in terms of profitability and cash flow. Its margin, however, has been narrowing in the last few quarters. If you buy the share a day before the bonus shares are to be allotted, then, unfortunately, you won’t get a bonus share. The company can use one or a combination of reserves mentioned below to fund its bonus issue. Bonus shares are allotted to a shareholder’s ISIN (International Securities Identification Number).

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The record date is the date by which you must have the share in your Demat account. For instance, BEL has considered 16th September as the record date. Shareholders will only be eligible for the bonus share if they have BEL in their Demat account until September 16, 2022. The government of India has set a limit on the percentage of shareholding that foreign shareholders are allowed to have in a company depending on certain industry sectors. The following are some of the unique features of bonus shares issuance. As at November-end in 2022, the price of 1 share of Wipro is nearly INR 407 while that of MRF Ltd is nearly INR 93,556.

As they are offered against profits, the company’s profit and loss account remains unaffected while its equity base increases. Bonus shares are the additional shares that a company offers to its existing shareholders as a ‘bonus’ without any additional costs. These are the company’s accumulated earnings that are not converted to dividend payouts but into free shares. Companies issue this type of share to encourage the participation of retail and small investors.

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