What is Bonus Share ?

Bonus shares are additional shares distributed by a company to its existing shareholders without any cost. They are issued from the company’s accumulated profits or reserves. The issuance of bonus shares increases the total number of outstanding shares, but the shareholder's proportional ownership in the company remains the same.

For example, if a company announces a 2:1 bonus share issue, shareholders will receive two additional shares for every share they already own.

Why Do Companies Issue Bonus Shares?

1. Rewarding Shareholders: Bonus shares serve as a token of appreciation to loyal shareholders.

2. Retaining Cash Reserves: Unlike dividends, bonus shares allow companies to conserve cash while still rewarding investors.

3. Enhancing Liquidity: By increasing the number of shares, bonus issues improve share liquidity, making them easier to trade.

4. Showcasing Financial Strength: A bonus issue indicates that a company has surplus reserves, highlighting its financial stability.

5. Boosting Market Confidence: Investors often perceive bonus shares positively, leading to increased confidence in the company.

Key Features of Bonus Shares

1. No Cost to Shareholders: Shareholders receive bonus shares for free, unlike a rights issue where they need to pay for the new shares.

2. Proportional Allocation: Bonus shares are distributed in a ratio (e.g., 1:1 or 2:1), make sure all shareholders benefit equally.

3. No Impact on Ownership: The total investment value remains the same since the share price adjusts to reflect the increased share count.

How Are Bonus Shares Issued?

The process of issuing bonus shares follows a structured path to make sure compliance and transparency:

1 Evaluating Financial Reserves: The company assesses its reserves or surplus profits to determine whether they are sufficient to issue bonus shares.

2. Board Approval: The company’s board of directors must approve the bonus share proposal.

3. Shareholder Approval: The proposal is presented to shareholders at the Annual General Meeting (AGM) for their consent.

4. Regulatory Filings: Necessary filings are made with regulatory authorities and stock exchanges.

5. Announcement of Record Date: The company announces a record date to determine eligibility. Shareholders holding shares on or before this date qualify for the bonus shares.

6. Credit of Bonus Shares: Bonus shares are credited to eligible shareholders’ accounts in proportion to their existing holdings.

Advantages of Bonus Shares For Shareholders

1. Increased Shareholding: Shareholders receive additional shares, boosting their total holdings.

2. Tax-Free Benefit: Unlike dividends, bonus shares are not taxed at the time of issuance.

3. Improved Liquidity: Bonus shares make it easier for shareholders to trade their holdings due to increased availability in the market.

For Companies

1. Preservation of Cash: Bonus shares allow companies to reward investors without impacting cash reserves.

2. Strengthened Investor Relations: Regular bonus issues foster goodwill and encourage long-term investment.

3. Showcasing Confidence: Issuing bonus shares signals the company’s strong financial position.

Disadvantages of Bonus Shares For Shareholders

1. No Immediate Monetary Gain: Unlike dividends, bonus shares do not provide immediate cash benefits.

2. Potential Dilution of Value: While the number of shares increases, the price per share typically decreases proportionally.

For Companies

1. Utilization of Reserves: Issuing bonus shares reduces the company’s reserves, potentially limiting funds for future investments.

2. Diluted Earnings Per Share (EPS): An increase in the number of shares results in lower EPS, which may affect investor perception.

Impact of Bonus Shares on the Market

Share Price Adjustment

After a bonus issue, the share price adjusts to reflect the increased number of shares. For example, in a 1:1 bonus issue, the share price typically halves.

Trading Volume

Bonus issues often lead to increased trading activity due to improved liquidity and investor interest.

Market Sentiment

Bonus shares are generally viewed positively, boosting investor confidence and attracting new buyers.

Bonus Shares vs. Stock Splits

While bonus shares and stock splits both increase the number of shares, they are fundamentally different:

Aspect Bonus Shares Stock Splits

Definition Additional shares issued for free to shareholders. Existing shares are divided into smaller units.

Purpose Reward shareholders and utilize reserves. Make shares more affordable and increase liquidity.

Impact on Reserves Utilizes reserves to issue new shares. Does not impact reserves.

Tax Implications of Bonus Shares

1. At Issuance: Bonus shares are not taxable at the time of receipt.

2. On Sale: When bonus shares are sold, capital gains tax applies. The purchase price for bonus shares is considered zero, which may lead to higher taxable gains.

Notable Examples of Bonus Share Issues

Several high-profile companies have issued bonus shares to reward their shareholders:

• Infosys Limited: Known for its consistent bonus share issues, Infosys uses this strategy to reward long-term investors.

• Reliance Industries: Reliance has frequently issued bonus shares as part of its growth-oriented approach.

Things to Consider Before Investing in Bonus Shares

1. Company Financials: Assess the issuing company’s financial health to make sure the bonus shares are backed by strong reserves.

2. Long-Term Growth Potential: Bonus shares are more beneficial for companies with promising growth trajectories.

3. Investment Objectives: Align your investment strategy with the long-term benefits of holding bonus shares.

Conclusion

Bonus shares are a strategic tool for companies to reward shareholders, conserve cash, and showcase financial stability. They offer several advantages, including increased shareholding, improved liquidity, and tax-free benefits at issuance. However, it’s essential for investors to analyze the issuing company’s financial health and growth potential to maximize the benefits of bonus shares.

For companies, issuing bonus shares strengthens investor relations and increase market confidence, making it a valuable approach for fostering loyalty and long-term growth.

Whether you’re an investor or a company, catch bonus shares and their implications can help you make informed decisions and unlock their full potential.