What is Bonus Share in Share Market?

Introduction

Unlike dividends, which provide cash payouts, bonus issues reward shareholders by increasing their shareholding proportionally. This guide explores the mechanics, benefits, and implications of bonus issues, helping investors make informed decisions.

What is Bonus Share?

Bonus shares are additional shares given to the existing shareholders without any additional cost, based upon the number of shares that a shareholder owns.

What is a Bonus Issue?

A bonus issue is when existing shareholders get extra shares in a certain proportion. A bonus issue occurs when a company converts its retained earnings or reserves into additional shares. These shares are distributed to existing shareholders in proportion to their current holdings. For example, if a 1:1 bonus issue is announced, shareholders will receive one share for every one share they hold. So if an investor holds 100 shares of a certain company, the investor will get 100 (1*10) shares in Bonus so after bonus issue investor has in total 200 Shares. The total market value remains unchanged, but the number of shares increases, leading to a proportional adjustment in the share price.

When the company issue bonus share to its shareholders, the term “record date” and “ex-date” are also mentioned. Let’s learn about the term “record date” and “ex-date” given below:

What is the ‘Record Date’?

A cut-off date set by a company is known as the record date. Investors must be owners of shares in the company by this date for them to be eligible to receive a Bonus share. The record date is established so that a company can identify the eligible shareholders and send them their Bonus share.

What Is the Ex Bonus Date?

The Ex Bonus Date(Ex-Date) is the cut-off date when a stock starts trading without the value of the proposed bonus issue. To qualify for the bonus shares, investors must hold the stock before this date. Purchases made on or after the Ex-Date do not include bonus entitlements.

Bonus Key Features:

• No Cash Outflow: The Company uses retained earnings, not cash.
• Proportional Ownership: Shareholders’ stake percentage remains unchanged.
• Price Adjustment: Share price decreases to reflect the increased supply (e.g., ₹1,000/share becomes ₹500 (ideally not necessarily) post a 1:1 bonus).

Who is Eligible for Bonus Shares?

Shareholders who own the company’s shares before the ex-date and on record date are eligible to receive bonus shares from the company.

Shareholders must purchase shares before the ex-date because if they purchase on the ex-date, the company will not give the ownership of shares, and therefore, they will not be eligible to receive bonus shares.

Advantages of Bonus Shares

For Investor

1) Investors do not have to pay any tax while receiving bonus shares from the company unlike dividend where tax needs to pay in the year when received, also there is no TDS unlike dividend.

2) Bonus shares are considered beneficial for long-term shareholders of the company looking to multiply their investment.

3) Bonus shares increases the outstanding shares of an investor in the company and enhances the liquidity of the stock.

4) Bonus shares help build the trust of an investor in the company’s business and operations.

For Company

1) The issue of bonus shares enhances the company’s value and increases positions and image in the market, gaining the trust of existing shareholders and attracting several small investors to be a part of the stock market.

2) The companies have more free-floating shares with the issue of bonus shares in the market.

3) Issue of Bonus shares benefits companies to get themselves out of the situation where they are not able to or simply not prefer to pay cash dividends to their shareholders.

Disadvantages of Bonus Shares

For Investor

1) There is no much of a disadvantage of owning the bonus shares from an investor’s point of view. However, they should know that profit of the company will remain the same, but the number of shares will be increased due to which earning per share will fall.

For Company

1) The company do not receive any cash while issuing bonus shares. As a result, the ability to raise money by following an offering is minimized.

2) Equity capital increases, reserves decrease.

3) Reduction in EPS and other per share values

4) Short-term price volatility

Types of Bonus Shares

There are two different types of bonus shares as follows:

1) Fully paid bonus shares

2) Partly-paid up bonus shares

1)Fully Paid Bonus Shares

Fully paid bonus shares are those shares that are distributed at no extra cost in the proportion of the investors holding in the company.

These types of bonus shares can be issued from the following sources:

1) Free reserves 3) Capital redemption reserves 4) Security premium account

2)Partly-Paid Up Bonus Shares

Before understanding party-paid up bonus shares, let’s understand what a partly-paid share is?

A partly paid share is a share in a company that is only partially paid compared to the full issue price. It means that the investor can buy partly paid shares without paying the total issue price.However, the remaining amount for partly paid shares can be paid in installments when the company makes calls.So when the bonus is applied in the partly-paid shares and converted into fully paid shares without calling out the uncalled amount through profit capitalization, it is called partly-paid up bonus shares.

Unlike fully-paid up bonus shares, partly paid-up bonus shares cannot be issued through a capital redemption reserve account or security account.

Why Do Companies Issue Bonus Shares?

The question now becomes, “Why do companies issue bonus shares if the stock price decreases in the same ratio as the bonus issue?”

1. To promote involvement in retail: A company’s share price that is too high will discourage some investors from purchasing it. Typically, New investors are hesitate to purchase stocks that have a greater price per unit. After Bonus issue shares price will become lower which makes them more accessible to retail investors.

2. Improve Liquidity: More shares in circulation make the stock more accessible to retail investors..

3. Indicates strong financial standing:  The Corporation awards bonus shares based on earnings or in situations when it has significant cash reserves that are not urgently needed. When a business issues bonus shares from reserves or profit, it shows that it is profitable and strong enough to issue additional equity shares. 

The Process of a Bonus Issue

• Announcement: The board proposes the bonus ratio (e.g., 1:2).
• Shareholder Approval: Requires approval at a general meeting.
• Record Date: Determines eligibility (investors must hold shares before this date).
• Ex-Bonus Date: Shares trade without the bonus entitlement from this day.
• Allotment: New shares are credited to demat accounts.

When Bonus shares are Credited in Demat account

Bonus shares are usually credited to your demat account by the “Deemed date of allotment“, which typically falls within a week after the Record date. Once credited, the bonus shares may be temporarily locked for trading until the “listing date” — which, in most cases, is the next trading day after the deemed allotment date.

To stay updated on upcoming bonus issues, you can check our [Upcoming Bonus List]

Conclusion

To summarize that, what is bonus share, the bonus shares meaning involves distributing extra shares to shareholders, usually from the company’s accumulated earnings or reserves. To define bonus shares, they are essentially free shares issued to shareholders, which increases the total number of shares held and reflects the company’s intent to reward its investors.

Bonus shares involve allotting additional free shares to existing shareholders to meet their liquidity requirements. Unlike issuing fresh shares, bonus shares don’t add to the company’s earnings. Bonus issues are strategic tools to reward shareholders and optimize capital structure. While they enhance liquidity and Investor confidence, investors should assess the company’s fundamentals and growth prospects.

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