Bonus Shares Meaning: Eligibility Criteria & Benefit - Motilal Oswal
Bonus Shares Meaning: Eligibility Criteria & Benefit - Motilal Oswal

What Is Bonus Share: Eligibility Criteria & Benefits

A bonus share is an additional share bestowed by a company to its existing shareholders for 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 shares.

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.

Bonus Issue of Shares

  • The term bonus issue of shares or bonus share issue indicates an issue of bonus shares by a company to its shareholders.
  • Companies issue bonus shares based on a constant ratio formula that permits the distribution of a fixed number of shares to the shareholder depending on the number of shares he/she already holds.
  • For instance, say a shareholder owns 100 shares of a company X. Now the company has decided to issue bonus shares in the ratio of 2:1, meaning the shareholder gets two bonus shares for each share he/she owns. As a result, the shareholder shall now have 200 bonus shares for the 100 shares owned.
    • Upon a bonus issue of shares, the dividend per share decreases as there is an increase in the number of shares.
  • The share value decreases upon a bonus issue, keeping intact the investment value of the shareholder as the number of shares owned by a shareholder is higher than before.

Advantages of Bonus Shares

  • A key benefit of bonus shares is that they assure its shareholders about the company’s calibre to service larger equity and also promote goodwill amongst shareholders.
    • A decrease in the share value with the bonus issue of shares serves as an attractive option for investors.
  • When the company makes huge profits, its stock prices go up. As a result, the bonus shares fetch handsome profits to its shareholders when transacted in the secondary markets for liquidity.

> Eligibility for Bonus Shares

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 bonus share issue. 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 after 2 days from 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 to receive 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.

Conclusion

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 login to their online Demat accounts to check their statement that reflects the delivery of bonus shares on a given day.

 

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