In India, tick market 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.
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.
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.
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.
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.
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