A bonus share is an additional share bestowed by a company to its existing shareholders free of cost. When the company, despite a profitable turnover, is unable to pay cash dividends to its shareholders due to a possible dearth of liquidity, the company issues new or additional shares in the form of bonus shares to its shareholders. Bonus shares are issued in proportion to the shares and dividends held by a shareholder, and no additional charges are levied on the shareholders by a company for issuing bonus share stocks.
Despite having ample liquidity, companies may still issue bonus shares to avoid the high dividend distribution tax levied on them. This tax must be paid by the companies at the time of dividend declaration.
The additional shares which are given to existing shareholders of a company with no charges involved are called bonus shares. These are not to be confused with a rights issue. These also include shares that may be issued to existing shareholders of a company. However, while bonus shares are issued “free”, as a stock bonus, the shares from a rights issue are not. They may be offered to shareholders at a lower rate (a discount), but the additional shares must be purchased by existing shareholders at a price.
A rights issue may also be generated for different reasons than bonus shares given out. A rights issue offers several shares, which are paid for if the shareholder wishes to buy them. Therefore, there is capital to be made by the company on selling these. A company may, therefore, offer a rights issue to raise capital for any reason, from company expansion to the requirement for the acquisition of another corporation. Bonus shares, on the other hand, are given free to shareholders when companies cannot generate dividends as there is a shortfall of liquidity in the company.
The bonus issue is based on the amount of shares that an existing shareholder currently holds. There are no cash payments made by shareholders for bonus shares, so the position that determines liquidity does not change. However, something that is crucial to be aware of is that the per-share dividend falls as the number of shares increases due to the issue of bonus share stocks. In a direct way, this does not impact the company issuing the bonus issue in terms of value or capital. Unlike a rights issue, the shareholder’s company investment does not face any dilution. The investment's value does not get altered simply because, although a decrease is experienced in the per-share income, the holder of shares now owns more number of shares. The essential purpose of the issuance of bonus stock is to equalise the excess in assets with “nominal share capital”.
The eligibility for bonus shares depends on the record date and ex-date of the shareholders.
The record date is a cut-off date set by the company, and the investors must be shareholders of the company before this date for them to be eligible to receive stock bonus share issues. Besides, the ex-date is a day preceding the record date set by the company.
In India, the delivery of shares into a Demat account takes place two days after the trading date. All existing shareholders before the ex-date and record date are eligible to receive bonus shares issued by a company. However, to qualify for bonus shares, the company stocks must be bought before the ex-date.
Any stocks bought on the ex-date shall not be eligible for an issue of bonus shares as the ownership of the stocks cannot be gained by the investor before the record date.
A bonus stock issue acts as an assurance by the company. This assurance means that the said company issuing bonus stock can service any of the larger equity it holds. What this essentially translates to, in simple words, is that any company would not issue bonus shares unless it were sure that it would turn profits from dividends and shares in the future. Consequently, bonus issues promote a sense of goodwill from the company. Companies that issue bonus shares do so by following the constant ratio formula, which permits for a set number of stock for every shareholder according to the amount of shares outstanding.
Once a new ISIN (International Securities Identification Number) is allocated to the bonus shares, they are credited into the shareholder’s Demat account within 10-15 days. Shareholders shall receive an SMS or Email about the credit of bonus shares into their Demat account, or shareholders can directly log in to their online Demat accounts to check their statement that reflects the delivery of bonus shares on a given day. You should be aware that a company can only be permitted to issue bonus stock if the Articles of Association sanction this action. In case the Articles of Association cannot do this, a special resolution must be passed at the general meeting of the company concerned.
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