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How do I Know If I Am Eligible for Bonus Share

How to know your eligibility for bonus shares?

Companies listed in the stock market provide their investors which different kinds of incentives when they make significant profits. These incentives are in the form of dividends and bonus shares. Generally, most companies distribute a portion of their profit to their investors in the form of dividends. However, on facing liquidity issues, even after having a profitable turnover, instead of paying out dividends, companies may prefer to issue additional shares to their existing shareholders without any additional cost.

What are bonus shares?

Bonus shares are the shares that the existing shareholders of a company are eligible to get without paying any additional charges. These shares are issued only when companies make decent profits in a particular quarter. Bonus shares are also a good way for companies to show their investors that they are having a positive growth and attract new investors. Shareholders can choose to transact these additional shares in the secondary market if they wish to meet their liquidity requirements from the shares.

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Companies issue bonus shares in proportion to the number of shares held by the existing shareholders. For instance, if a company declares a bonus share at 5:1, then each investor will get five new shares for each share of the company that they own. So if someone has 10 shares of a company, after the issue of bonus shares, they will have 50 additional shares.

What are the eligibility criteria for bonus shares?

A shareholder of the company who has owned shares of the company, which are brought before the record date and the ex-date, will be eligible for the bonus shares. The difference between the ex-date comes two days before the record date because the Indian stock market follows a T+2 settlement cycle for the delivery of shares. Therefore, if an investor buys the company's shares on the record date, they will not be eligible for the bonus issue. To clarify things, let's understand what record date and ex-date are.

What is the record date?

The record date is the date the company decides as the cut-off date for an investor to be eligible for the bonus shares. This means that shareholders who have the company's shares in the DEMAT account before this date will be eligible to receive bonus shares.

What is ex-date?

Ex-date falls one day before the record date set by the company. So, to be eligible for the bonus share, an investor must buy the share at least one day before the ex-date.

How do the bonus shares get credited?

An investor who is eligible for the bonus share gets the bonus share in their account fifteen days after the ISIN or International Securities Identification Number is issued for the bonus shares issued to them. The shares will get credited to the DEMAT account of the person.

What are the benefits of a bonus share?

There are numerous benefits that an investor gets from the bonus share, such as follows -

Investors are not required to pay any additional taxes when they receive bonus shares from a company.
These additional shares will generate long-term wealth for the investors.
The investors get these bonus shares without paying any additional charges to the company. These shares are offered free of cost because the companies benefit from the increase in the liquidity of the stock in the market.
It also builds trust in the minds of the investor towards the company, and they think that they have benefited from it because they have invested in the company.

Why does a company issue bonus shares?

A company issues bonus shares primarily to showcase its consistent growth and attracting retail investors.

Some of the other reasons are as follows:

It provides a better alternative to companies that are not willing to pay cash dividends to their shareholders and maintain their liquidity.
By issuing bonus shares, the company earns the trust of its existing investors.

Final words

So next time you come across any announcements regarding the issue of bonus shares, to avail of the benefit, check the ex-date and record date before investing. Furthermore, check your DEMAT account regularly for new shares to keep track of the credit of bonus shares.