A bonus issue refers to the issue of additional shares to existing shareholders at no cost. Instead of providing dividends, a company can opt to issue more shares.
What ends up happening is that the total number of shares owned by shareholders increases but the overall value of their investment remains unchanged.
Let's understand the bonus issue with a simple example:
Mr Ravi owns 100 shares of a company priced at Rs 200 each. If the company declares a 2-for-1 bonus issue, Mr Ravi will receive two additional shares for every share he owns.
Therefore, his holdings will grow from 100 shares to 300 shares, but the total value of his investment will not change.
Before Bonus Issue: 100 shares × Rs 200 = Rs 20,000
After Bonus Issue: 300 shares × Rs 66.67 = Rs 20,000
To qualify for bonus shares, shareholders must own their shares before the ex-date. If shares are bought on or after the ex-date, those purchasers will not qualify for bonus shares.
If a company announces a bonus issue on July 30th with a record date of August 8th, the ex-date would be August 7th. This means that anyone buying shares on August 7th or later will not be eligible to receive the bonus issue.
Let's look at the companies that are expected to pay bonuses in the month of November:
Bajaj Steel Industries Ltd is into manufacturing cotton ginning and pressing machinery, as well as prefabricated building structures and related products.
The company has also entered a technical collaboration with the Continental Eagle Corporation to manufacture specific equipment in India. It's present in over 40 countries, including the US, Southeast Asia, and Europe.
They have provided an ROE of 21.3% over the last 3 years. They have also announced a 3:1 bonus issue, which means you will receive 3 shares for every share you own. The record date is set at 12th November 2024.
The company is also known as Planter's Polysacks Ltd and it specialises in the manufacturing and trading of containers, packaging, textiles, and related products.
The company trades in a variety of chemicals, plastics, and rubber products like soda ash, acids, bases, bleaching powder, polypropylene bags, and plastic containers.
However, due to poor financial conditions, Planter's Polysacks did not conduct any business operations in FY21 and has not generated revenue from operations or other income for several years, making it a loss-making entity.
Despite these challenges, the company is nearly debt-free and has achieved a profit growth of 206% CAGR over the past five years. The company has issued a 2:1 bonus which means that for every share you own, you will receive two additional shares. The record date for the bonus issue is 8th November.
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You might wonder why companies opt to issue bonus shares if the stock price adjusts downward in proportion to the increase in shares :
1. To Encourage Retail Participation
High share prices can deter some investors from buying in. By issuing bonus shares, the total quantity of shares increases and the price per share lowers which makes them more accessible to everyday investors.
2. To Signal Financial Strength:
When a company issues bonus shares, especially from earnings or significant cash reserves, it shows profitability and reflects confidence in the company's financial health.​​​​​​​​​​​​​​
Conclusion
Bonus shares are extra shares given to shareholders from the company's profits or reserves. These are essentially free shares that increase the total number of shares a person owns, showing that the company wants to reward its investors.
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