What are Bonus Shares?

Bonus shares are additional shares that a company gives to existing shareholders for free. The bonus shares are issued as new or additional shares at no cost and in proportion to each shareholder's shares and dividends.   

Sometimes, a company may not be able to pay a dividend in cash due to a lack of liquid funds, despite having a profitable turnover. When this occurs, the company issues bonus shares instead of paying a cash dividend to its shareholders. To meet liquidity needs, shareholders may transfer these shares to the secondary market.   

A company will often issue bonus shares even if it does not have a shortage of liquid funds. Certain companies use this strategy to avoid the highly levied Dividend Distribution Tax, which must be paid when dividends are declared. This article explains bonus shares meaning, their advantages and disadvantages, and more. 

Why Do Companies Issue Bonus Shares? 

Having understood what is bonus share, now let’s understand why companies issue them: 

• By lowering the share price and increasing liquidity for outstanding shares, they encourage more retail investor participation. 
• Bonus issues can be a valuable alternative to dividend payments to reward shareholders. 
• They reflect a strong financial position which can generate value for shareholders while growing. 

Who is Eligible for Bonus Shares?  

Bonus shares are available to shareholders who own company shares before the record date and the ex-date established by the company. Indian shares are delivered according to the T+2 rolling system, where the ex-date is two days before the record date.  

The shares must be purchased prior to the ex-date in order to be eligible for the bonus shares. If the shares are purchased on the ex-date, they will not be credited with ownership as of the record date. 

Upon issuance of a new ISIN (International Securities Identification Number), bonus shares are credited to shareholder accounts within fifteen days. 

Read More: To know more about When Bonus Shares are Credited in Demat Account 

Types of Bonus Shares 

There are two types of bonus shares: 

Fully Paid Bonus Shares  

These shares are distributed based on the proportion of investors' equity in the company at no additional cost. There are several sources from which these bonus shares can be issued: 

Profit and loss account  

Capital reserves  

Capital redemption reserves 

Security premium account 

Partly-Paid Up Bonus Shares  

A partially paid share is one that is only partially paid compared to the full issue price. In other words, the investor can purchase partially paid shares without having to pay the full issue price. In the case of partly paid shares, the remaining amount can be paid in instalments when the company calls.  

Bonus shares are called partly paid up bonus shares when the bonus is applied to partially-paid shares and converted into fully-paid shares without calling out the uncalled amount through profit capitalisation.  

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

 Advantages of Bonus Shares  

The key advantages of bonus shares are: 

Benefits to shareholders: 

1. Company bonus shares are tax-free for investors. 
2. Long-term shareholders looking to multiply their investment can benefit from bonus shares. 
3. Shareholders receive free bonus shares as they are issued by the company, increasing their outstanding shares and improving their liquidity. 
4. By investing in the company, bonus shares build investor trust in the company's business and operations. 

Benefit to Company: 

1. A bonus share enhances the company’s value, which also improves its position in the share market. 
2. The issue of bonus shares increases the number of free-floating shares in the market. 
3. Bonus shares help companies that cannot or do not wish to pay cash dividends to their shareholders. 

Disadvantages of Bonus Shares 

Here are some disadvantages of bonus shares: 

For shareholder 

1. From the investor's perspective, owning bonus shares is not much of a disadvantage. It is important that they understand that bonus shares do not increase profits, but they will increase shares since the earnings per share will decrease. 

For Company 

1. When bonus shares are issued, the company does not receive any cash. This reduces the possibility of raising money following an offer. 
2. The cost of bonus shares issued by a company accumulates over time when it keeps issuing bonuses instead of paying dividends. 

Conclusion 

Overall, bonus shares serve as a positive signal from the company to the market, reflecting confidence in the company's future prospects and commitment to shareholder value. This positive sentiment can attract new investors and contribute to the overall growth and success of the company. 

Investors should be mindful of potential tax implications when dealing with bonus shares, as they may be subject to capital gains tax upon sale. Seeking advice from tax professionals or financial advisors is recommended to ensure a thorough understanding of how bonus share works and the tax regulations specific to their jurisdiction. Now you can experience the future of trading with online trading app - empowering you to seize market trends.