Bonus Shares Meaning, Types, Advantages and Disadvantages

As the who is eligible for bonus shares of the company rise which in turn leads to an increase in the free-float shares in the secondary market. It will increase liquidity in the market because of the rise in the number of outstanding shares in the market. When a firm is unable to pay its employees, it is common for the company to give out free shares to them as bonus, which they can sell to meet their financial requirements. ● Shareholders who invest to earn dividends might step back from further investment.

Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor’s account.” Issuing bonus shares will not change the face value of the share price of any company. As dividends are paid only at a point in time but these bonus shares will reap the benefits for a long time. Investors do not have to pay the tax while receiving bonus shares. When announcing a bonus issue the company also informs the shareholders regarding a record date.

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Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge. However, the remaining amount for partly paid shares can be paid in instalments when the company makes calls. ICICIdirect.com is a part of ICICI Securities and offers retail trading and investment services. None of the research recommendations promise or guarantee any assured, minimum or risk free return to the investors. 4.Outstanding Loan – In case of any loan availed from a financial institution, then prior permission has to be obtained from the institution before proceeding with the bonus issue.

• Both are important and effective corporate actions to attract investors by increasing the number of outstanding shares and reducing the share price .
• Dividends are paid to shareholders in cash, whereas bonus issues payments are in the form of additional shares.
• 3) Bonus shares are free of cost to shareholders as they are issued by the company, which increases the outstanding shares of an investor in the company and enhances the liquidity of the stock.
• Read all the documents or product details carefully before investing.

Hence, to qualify for bonus shares you must buy shares before the ex-date. If you buy on ex-date the shares will not get credited to your account by the record date. A stock split is another way for companies to increase the number of shares trading in the market. Although both sound similar but stock split and bonus shares aren’t quite the same. A stock split allows companies to increase share liquidity but involves no cost.

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After the bonus issue, the dividend per share and share value decreases as there is an increase in the number of outstanding shares in the market. The investment value of the shareholder will increase after the bonus issue. Further, these bonus shares in the market are generally lower than the price per share, hence making them lucrative as well as affordable to the investors. The firm generally announces bonus shares with a record date, which is the day on which the bonus shares are calculated.

The corporate, on the other hand, receives no income from the release of bonus shares. Shareholders who own shares of the company before the record date and the ex-date set by the company are eligible for bonus shares. India follows the T+2 rolling system for the delivery of shares, wherein the ex-date is two days ahead of the record date. 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.

The reserves by revaluation cannot be capitalized for a bonus issue nor should it be in lieu of a dividend. Special care should be taken that the total share capital does not exceed the authorized share capital of the company. According to the relevant provisions of the Income Tax Act, 1961, there are no tax implications on a bonus issue for shareholders in a particular financial year. This means that you don’t have to pay taxes for receiving the bonus shares.

What are bonus shares? All you need to know

The book value per share decreases due to an increase in the number of outstanding shares. A record date is a date set by the company to evaluate the existing shareholders and distribute bonus shares to them. It usually takes 15 days from the record date for the Bonus shares to be credited to your demat account, but this depends on the registrar and share transfer agent . Until the bonus shares are credited to your demat account, your holdings might show an “artificial” loss. Once the bonus shares are credited to your demat account, your profit and loss will be restored, and the “true” value of your portfolio would be reflected. Companies issue bonus shares based on a constant ratio formula that permits the distribution of a fixed number of shares to the shareholder depending on the number of shares they already hold.

Also, considering other reaping financial rewards, the investors do not have to pay taxes while they receive bonus shares from the company. After the announcement of a bonus share issuance, trading stays open, with new shareholders being added and withdrawn every minute. The partially paid bonus shares apply to the partially paid shares. These are the shares the shareholders partially paid at issuance. The rest of the amount is due when the company makes the call. There are different types of shares, such as equity, preference, bonus, and others.

Marketing and distribution of various financial products such as loans, deposits and Insurance are powered by Finzoomers Services Private Limited. Hence, it is very important that traders ensure that the charts have been adjusted for bonus before applying anytechnical analysisstudies. The adjustment in charts needs to be done in both price and volume before analysis.

Bonus shares are accumulated profits that a company distributes to the current shareholders as free shares. There are no additional costs involved, and the shares are given the basis of the current holding of shareholders. There are not many disadvantages for the investors while receiving bonus shares but it should be kept in mind that though profit will remain the same but EPS will fall.

In India, the delivery of shares into a Demat account takes place two days after the trading date. All existing shareholders before the ex-date and record date are eligible to receive bonus shares issued by a company. However, to qualify for bonus shares, the company stocks must be bought before the ex-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.

Bonus issue – Guidelines to be followed by companies:

While partly paid-up shares are paid in installments by the shareholders as called by the company. However, in India as far as a practical approach is concerned, partly paid-up shares have not come into play. Dividends are paid to shareholders in cash, whereas bonus issues payments are in the form of additional shares. Thus, shareholders can benefit from price appreciation in the future. The term bonus issue or a bonus share issue is used to define an issue of bonus shares. The number of shares held by a shareholder is what a bonus issue is based on.

• The issue of bonus shares enhances the company’s value by increasing its positions in the market as market capitalization is concerned.
• It implies that the company is strong enough to finance the additional equity.
• To earn bonus shares, shareholders must hold shares before the ex-date.

The existing shareholders will get the benefits of increasing the number of shares held by them without paying any extra cost. There are certain situations when a company is unable to pay a dividend in cash, because of a possible shortage of liquid funds, despite having a profitable turnover. In such cases, the company issues bonus shares to the current shareholders instead of paying the dividend in cash. Bonus shares are issued as new or additional shares, free of cost and in proportion to the shares and dividends held by the shareholder.

Companies increase the number of shares trading in the market either by bonus issue or by a stock split. They may sound similar but have a minute technical difference. While a stock split allows companies to increase their share liquidity, it involves no cost. Bonus shares, on the other hand, are paid out of the capital reserve.

Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone. It increases the cash dividend receivable in the future, as the number of shares held by the shareholder has increased. It increases the investments of the shareholder, and it is tax-free. When an investor gets any bonus shares the cost is treated as NIL and the date of credit of bonus shares is considered as the purchase date. Also for the purpose of Income Tax, the method adopted is First in First out .

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. So, are you eligible for the upcoming shares on thebonus shares list in 2022, or the companies likely to declare bonus shares in 2022. The eligibility will depend on the record date and ex-date of the shareholder. An ex-date is a date before the record date fixed by the company.

Not in whole numbers, the balance amount will be credited to the registered bank account. 5.Stock Exchange – In case of a listed company, the Stock Exchange should be informed of the issue immediately after it is finalized at the board meeting. A Demat account ensures a simple, seamless, paperless, and genuine trading and investing. However, to maintain the genuineness of the process, you need to provide certain documents for opening a demat account. Bonus share issue impacts the Earning per Share , calculated by dividing a company’s net profit by the number of owned shares. However, a decrease in EPS is compensated in the long term by a corresponding increase in the number of owned shares.

When the company issues bonus shares, since the profits or reserves of the company are converted into share capital, there is a ‘capitalisation’ of the profits. The company cannot charge the shareholders for the issue of the bonus shares. A sum that is equal to the value of the bonus issue, is adjusted against the profits or the reserve, and then transferred to the Equity Share Capital Account. After announcing a bonus issue, a company simultaneously announces the date of the issuance of bonus shares, known as the record date. All existing shareholders on the record date are eligible to receive bonus shares. Yes, it is good to buy stocks of companies that are in plans to issue bonus shares because you can receive extra shares at no cost.

The advantage of a dividend is immediate and in the form of cash, but the benefit of a bonus share issuance is indirect. T+2 rolling settlement is used in India, which implies the ex-date is two days prior to the record date. To become a shareholder before the record date and be eligible for a bonus share issuance, you must purchase a company’s shares at least a day before the ex-date. When you invest in a business by acquiring its shares, the firm may periodically reward you with dividends.