Will I Be Eligible to Get Additional Share of A Company If I Buy Shares On Ex Date
Companies, at times, issue additional shares or bonus shares to their existing shareholders. This is done when a company doesn’t have enough liquidity to pay off the dividend to its shareholders. The ex-date matters a lot to make you eligible for additional shares. In this article, we will understand this.
What are Additional Shares (or Bonus Shares)?
Additional Shares are Bonus shares that a company issues to its existing shareholders free of cost.
This happens when a company faces liquidity issues in spite of having good profits and doesn’t have enough funds to pay dividends to its shareholders. As a result, the company declares bonus shares to the existing shareholders.
Start Investing with Free Expert Advice!
Bonus shares are issued by the company in the ratio of shares and dividends held by a shareholder. Existing shareholders don’t have to pay any charges for receiving bonus shares. They are completely free. Shareholders can sell these shares in the secondary market.
At times, it has been found that certain companies issue bonus shares even though they don’t have any liquidity issues. This is done with an aim to reduce stock prices and attract higher numbers of investors.
What is Bonus Issue?
Bonus issue means the issue of bonus shares by the company. The bonus issue depends on the number of shares held by a shareholder. The shares of bonus issues are based on the constant ratio formula. As per this, the distribution of shares to the shareholders depends on the number of shares they already hold. When the bonus issue of shares happens, then the dividend per share decreases. This is because bonus shares are issued in lieu of payment of cash dividends.
Company issues bonus shares when they are looking towards the bright future of the company. This means they can guarantee an increase in profits for the company. Therefore, a bonus issue promotes the goodwill of the company.
Eligibility Criteria for Bonus Shares
In order to be eligible for bonus shares of the company, you need to own the shares of the company before the record date and ex-date which is set by the company. Indian stock markets follow the T+2 rolling system for the delivery of shares. This means that you get the delivery of the scrips after two days of purchase of shares of the company.
Ex-date is two days before the record date. Shares must be purchased by the investor before the ex-date. If the investor buys the shares on the ex-date, then they won’t be credited to the investor’s account on the record date. Due to this, the investor will not be eligible for the bonus shares.
You shall note that bonus shares are credited to the shareholder’s accounts within fifteen days of the allotment of the ISIN (International Securities Identification Number).
Advantages of Bonus Shares
- The major benefit of Bonus shares is that it assures the company’s calibre to service larger equity. In addition to this, it also promotes goodwill for shareholders.
- With the bonus issue of shares, the value of the share decreases. This urges investors to invest in bonus shares.
- The stock prices of companies increase when they earn huge profits. Shareholders can sell the bonus shares in the secondary market when stock prices go up and earn big profits.
Some Guidelines for Issue of Bonus Shares
- The Articles of Association need to sanction the bonus issue before bonus shares can be issued.
- If the Article of Association doesn’t sanction it, then a special resolution needed to be passed by the company in its general meeting.
- When the need arises for a general meeting to approve the issuance of bonus shares, then in such case the issue has to be sanctioned by the shareholders.
- SEBI- issued guidelines must be followed.
- Due to bonus issues, the total share capital shall not go in excess of the authorized share capital.
- The RBI’s consent must be taken before the issuance of bonus shares.
Conclusion
Issuance of bonus shares by the company increases its goodwill as they are able to prove that they are going to serve the larger equity they hold. As an investor, you shall take care that you buy the shares of the company before the ex-date to be eligible for bonus shares.
