When Bonus Shares are Credited in Demat Account?

When Bonus Shares are Credited in Demat Account?

Companies that turn a profit frequently give their shareholders some sort of compensation. The dividend payment method is the most popular one. The distribution of a portion of the company's profit to its shareholders is all that constitutes a dividend.

There are times when a business, although having a lucrative turnover, is unable to pay a dividend in cash due to a possible absence of financial liquidity. Instead of paying the dividend in cash in such circumstances, the corporation instead awards bonus shares to the present owners. When bonus shares are credited to the Demat account, It indicates a rise in the equity of the shareholders. 

Bonus shares are distributed to shareholders in proportion to the number of shares and dividends they currently own, at no additional cost.

Even in cases where they do not have a scarcity of cash, companies frequently issue bonus shares. Some businesses use this tactic to avoid paying the heavy Dividend Distribution tax, which must be paid when reporting dividends.

Since the company's earnings or reserves are transformed into share capital when bonus shares are issued, the profits are "capitalised" at this time. The issuance of bonus shares cannot be taxed on the shareholders by the firm. A sum equivalent to the value of the bonus issue is transferred to the Equity Share Capital Account after being deducted from the profits or the reserve.

What is a Bonus Issue?

The terms "bonus issue" and "bonus share issue" both refer to the issuance of bonus shares. A bonus issue is dependent on the number of shares that a shareholder owns. The position of liquidity is guaranteed to stay intact with no monetary payments. It is significant to observe that the dividend per share decreases as a result of a bonus issue increasing the total number of shares. The capital or overall worth of the business is not impacted by this. 

This doesn't erode the shareholder's interest, unlike right issues of shares. Despite a decline in income per share, the investment's value is unaffected since the shareholder now owns a greater number of shares. The basic goal of issuing bonus shares is to match the Nominal Share Capital's surplus of assets over liabilities.

A bonus issuance is a guarantee that the business can pay down its greater equity. This indicates that if the corporation couldn't ensure growth in the share's earnings and a payout of dividends in the future, it wouldn't have issued bonus shares.

Consequently, a bonus issuance also fosters business goodwill. The constant ratio method, which allows for a fixed number of shares to be issued to each shareholder depending on the number of existing shares, is used by companies to determine when to issue bonus shares.

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Table of Content

  1. What is a Bonus Issue?
  2. Who is Eligible to Receive Bonus Shares?
  3. What Time Period Do Bonus Shares Become Tradable?
  4. Guidelines To Be Followed By a Company Before Issuing Bonus Shares
  5. Benefits of Bonus Share

Who is Eligible to Receive Bonus Shares?

Companies will elect who shall be entitled to receive Bonus Shares through the Record Date. Trading continues after a bonus share issuance has been announced, and new shareholders are being added and removed every minute. 

But with the number of shareholders constantly fluctuating, how can organisations identify the existing shareholders? Companies that intend to offer bonus shares choose a record date to determine the number of current shareholders. 

To identify stockholders, the company's bookkeepers check the records on the record date. In addition to announcing an ex-date, a corporation will declare a bonus share issuance. 

The ex-date is the final day to purchase shares of the corporation in order to qualify for a bonus share issuance. Bonus shares are not available to new employees who join the business after the ex-date. India uses a T+2 rolling settlement, which implies that the ex-date is two days before the record date. 

What Time Period Do Bonus Shares Become Tradable?

The issuing of bonus shares contributes significantly to raising shareholder liquidity. The purpose of the bonus share issue, like that of dividends, is to distribute accumulated profits to shareholders. The benefit of a bonus share issuance is indirect, whereas the benefit of a dividend is immediate and comes in the form of cash. 

Gains are gained by issuing more shares, but what happens if an investor wishes to sell those extra shares for a profit? He or she must wait for the bonus shares to show up in the online Demat account in order to sell them.

With the advent of electronic media, instantaneous financial transactions have become commonplace. Once it has been established that a shareholder qualifies for the bonus share issue, a new ISIN (International Securities Identification Number) is given to the bonus shares. 

When you open a Demat account and when a new ISIN is assigned, the bonus shares are credited to the shareholders' Demat accounts within no more than 15 days.

Guidelines To Be Followed By a Company Before Issuing Bonus Shares

  • Bonus shares cannot be issued before the Articles of Association approve the bonus issuance. At its general meeting, the firm must approve a special resolution act if the articles of association are unable to do so.
  • In the event of a general meeting, the shareholders must also approve the bonus issuance.
  • Guidelines published by SEBI must be adhered to.
  • The business must make sure that a bonus issuance does not cause the total share capital to surpass the authorised share capital. If such a circumstance arises, the Memorandum of Association's capital provision has to be changed by raising the permitted capital.
  • The financial institution or institutions concerned must be notified in advance if the firm has taken out loans.
  • A corporation must contact the Reserve Bank and obtain its approval prior to issuing bonuses.
  • Any bonus shares that are to be awarded need to be paid in full. In the event that shares are paid in part, the shareholders will be responsible for the outstanding balance.

Benefits of Bonus Share

Here are some benefits of bonus shares:

  • Because listed shares are often expensive, it might be difficult for current shareholders to raise their stakes.
  • The corporation issues bonus shares, increasing the total number of shares without imposing any additional costs on owners.
  • By increasing the share base, bonus shares increase the ownership that shareholders have in the business.
  • The value of bonus shares may eventually increase as a result of the company's growing share price.
  • In the secondary market, bonus shares can be sold for a greater price, giving stockholders a positive return.
  • The corporation believes that by distributing the share price among a larger number of shares, bonus shares increase liquidity.
  • A greater number of retail investors may become interested in the company's stock as a result of the share price reduction.

Conclusion

An increase in a shareholder's equity in a corporation is shown when bonus shares are deposited to a Demat account. In proportion to their current holdings, bonus shares are granted to current shareholders as a kind of compensation or an incentive by the firm. 

Investors will find the bonus share crediting process to be simple and convenient. Once the shares have been credited, they are simple to trade or keep for potential future investment. Altogether, when bonus shares are credited to a Demat account it is a  good addition to a portfolio for investors, increasing total wealth and the likelihood of future profits.

When Bonus Shares Are Credited In Demat Account FAQs

You will receive credit for the bonus shares on your demat account. Typically, the procedure takes 10 to 15 days.

Prior to the record date and ex-date, all current shareholders are qualified to receive bonus shares. The T+2 rolling mechanism is used in India for the share distribution. Therefore, you must purchase equities before the ex-date in order to be eligible for bonus shares.

To avoid paying a cash dividend, a corporation with cash flow problems grants bonus shares to current owners. Companies offer bonus shares to boost the availability of equity shares in the market. By bringing down the share price, it attracts investors and makes shares more accessible to them.

No, shareholders do not pay a fee to get bonus shares.

When bonus shares are credited to the demat account, they can then be sold or traded in the market. They are handled the same as standard shares and are up to the investor to decide whether to buy or sell.