In India, tick marked securities are receiving traction. For equities investors, the chances of gaining high profits has become a big draw. Over time, the value of the invested capital increases, but this is not the only factor that determines returns. Dividend distributions and bonus share offerings are methods of distributing a portion of a company's profit to shareholders. The appeal of returns through stocks held for a long time is good enough for most investors to be attracted to the markets, but the declared interim bonus shares also hold great esteem for investors.
What options does a corporation have if it wants to share a portion of its profits with its shareholders? It can just send money in the form of dividends. But what if the corporation refuses to send money? A bonus share offering is a great way to go. It is not a cash flow transaction, but rather a wealth transfer to shareholders.
A bonus share issue is the free distribution of additional shares to a company's current shareholders. The shares are distributed according to the percentage of existing ownership. By lowering the price of the shares, the bonus share issue also serves to improve the company's equity base and increases retail participation.If a corporation announces a 5:1 bonus share issue, it means that for every existing shareholder's share, he or she will receive five new shares. The issuance of new shares simply lowers the share price and lowers the entry barrier to the stock market. Bonus shares are issued to existing shareholders of a company.
Through the record date, companies determine who is eligible to earn bonus shares. After the announcement of a bonus share issue, trading stays open, with new shareholders being added and deleted every minute. However, how do corporations determine the identity of current shareholders, given the continually changing number of shareholders? Companies that plan to distribute bonus shares set a record date to ascertain how many existing shareholders there are.
The company's bookkeepers verify the records on the record date to identify stockholders. When a company declares a bonus share issue, it also announces an ex-date. The ex-date is the last day to buy the company's stock in order to be eligible for a bonus share issue. Anyone who joins the company after the ex-date is not eligible for bonus shares. T+2 rolling settlement is used in India, which means the ex-date is two days prior to the record date.
Companies that give out bonus shares to their loyal shareholders can be any companies that are listed on the stock exchange. This year alone, in 2022, a record of over 70 companies declaring bonus shares to its shareholders has been achieved. From bonus share handouts, companies reward their existing shareholders and ensure that their shares are limited to shareholders who have been with the company for a long time. New tax rules ensure that investors gain from bonus shares being handed out, provided they have held their original company shares for a certain period. Large corporations like Wipro, ICICI Bank, GAIL, BPCL, L & T, and more have issued a significant amount of bonus shares to loyal and longstanding shareholders.
Bonus share issuance is a significant part of increasing shareholder liquidity. Bonus share issuance, like dividends, are meant to transmit accrued earnings to shareholders. The advantage of a dividend is immediate and in the form of cash, but the benefit of a bonus share issue is indirect. Gains are realised in the form of additional shares, but what if an investor wants to cash in on the extra shares? To sell the bonus shares, he or she will have to wait for them to appear in the online demat account.
Instant financial transfers have become the norm with the introduction of electronic media. Once a shareholder is identified as being qualified for a bonus share issue, the bonus shares are given a new ISIN (International Securities Identification Number). It takes no more than 15 days for the bonus shares to be credited to the shareholders' demat accounts when a fresh ISIN is assigned.
India has recently witnessed several companies giving out bonus shares, especially in record numbers in 2022. Due to a great performance of company stocks post the world health crisis, in FY22, companies are dishing out bonus shares in the multitude. Since 2010, the 2022 bonus share payout has been the highest yet with above 70 companies offering shareholders bonus shares till July 2022. If we go by the pace of declarations, we can expect an excess of 2018’s bonus share issuances, some 78 companies, this year.
The growth of corporate profits has spurred on the issuance of shares, and this is touted to increase. The revised tax laws regarding bonus shares also encourages bonus share issuance, with bonus stripping curbed entirely. Some of the key companies that have issued bonus shares in 2022 include Torrent Pharma, Indian Oil, REC, Au Small Finance, Ajanta Pharma, etc.
The issuance of bonus shares is known as the capitalisation of a company’s reserves. This means that accumulated reserves of a company gained out of profits are turned into capital by way of issuing bonus shares. Bonus shares can improve the liquidity of a company as the price of the company’s shares fall, depending on the ratio of issuance. The lower the price of the scrip, the higher the increase in retail participation is. Furthermore, the faith of investors is cemented when financially robust companies issue bonus shares.
Corporate profits rose in FY22 by 48%. The corporate profit to GDP ratio was, thus, lifted to 4.3% from an incredibly low of 2.3% seen in FY20. The recovery has been majorly led by the BFSI, energy, IT and metal sectors. In the revival of the economy, the sectors of real estate, chemicals, standalone refineries, and agricultural processing firms have also seen profitable margins. The way that companies provide rewards for stockholders is by bonus issues, buybacks, or special dividends. What constitutes the exact rewards depends on the company in question, its plans for future business, and decisions taken by members of the company’s board. Investors wanting a steady income seek out shares of companies that offer bonus shares on a regular basis. The investor community as a whole favours regular bonus share issues since the share price often appreciates after the issuance of bonus shares.
Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account