Indian Stocks Beginner

What are bonus shares?

A lot of people are unaware of what bonus shares are. If you’re one of them, well, you don’t have to be. Ignorance is a choice, and so is knowledge. We hope you make the right one today. And if you’re saying yes to knowledge, give this write-up a thorough readthrough.

Understanding bonus shares

If you want to grow your money, it is important to understand the various investment options out there. Bonus shares are one such option. Let’s start with a basic definition to understand what they are.

What are bonus shares?

Bonus shares are additional shares that a company distributes to current shareholders. It is a kind of “bonus” that a company offers when it cannot pay out dividends. Such companies are still usually earning a decent profit.

So, if you have 1,000 shares and your company announces a one-for-two plan, you will receive 500 bonus shares.
These shares give you an additional source of income while you hold on.

How are bonus shares issued?

Companies only issue such shares when they are low on cash. The shares are usually given instead of cash dividends. The issuing authority usually follows some basic procedure of this type while issuing these shares:

  • First, they call for a board meeting.
  • Then they actually convene the board meeting.
  • To start with, the company circulates draft minutes.
  • Next, it issues a notice for a general meeting.
  • The company then convenes the general meeting and files form number PSA-3.
  • Finally, the share certificates are issued.

The impact of bonus shares on shareholders and the company’s stock price

The issue of such shares does have an impact on shareholders and the company’s stock price. It is important to understand what its impact looks like from various points of view.

Firstly, we begin with the investors’ point of view. The shareholders do not need to pay additional charges to receive bonus shares. However, the prices of each share fall. So, such shares mainly help if you are a long-term shareholder.

From the company’s point of view, these shares help defer the pressure of paying the shareholders cash dividends. Also, they can enhance the company’s reputation.

Eligibility and allotment of bonus shares

Now that you know what a bonus share is, it is important to also be aware of the eligibility criteria and allotment process for these shares.

Eligibility criteria

The eligibility for these shares mainly depends on the shareholder’s ex-date and record date. The record date is when the company checks its records to identify eligible shareholders. The ex-date is the day before the record date.

To be eligible for these shares, the shareholder must buy a share before the ex-date.

The allotment process

The allotment of bonus shares usually depends on the company. Every company might have a different process, but usually, it is pretty much along the following lines. A board meeting is conducted, a general meeting is called for, form number PSA-3 is filled, and such shares are issued.

Such shares are of two types: fully-paid and partly-paid ones. You can issue fully paid these shares from the profit and loss account, capital reserves, capital redemption reserves, and the security premium account.

The role of the board of directors in the issue

The board of directors plays a vital role in the issues of these shares. First, they are part of the board meetings where the agenda of these shares are placed. Then after a brief discussion occurs between them, they are asked to present their opinions. It on the basis of these opinions that a general meeting is called for. Only then is the approval notice for such shares sent to the members responsible.

Impact on shareholders

Bonus shares have a more significant impact on shareholders, so let’s take a moment to focus on that a little more in this section.

The impact of bonus shares on shareholders’ equity

These shares are free of cost. Shareholders hold extra shares through them. It doesn’t dilute the equity of other shareholders.

The impact of bonus shares on dividends

Just like other shares, the value of the shares you receive as a bonus can always increase or decrease in the future. When that happens, it can affect the dividends you receive from it.

The impact of bonus shares on the number of shares outstanding

The outstanding shares of a shareholder are increased in the company. However, as it decreases the stock price, the shares are less valuable for a while.

Impact of bonus shares on the company’s financials

To fully understand the impact of bonus shares on the company’s financials, read the description below.

Impact on the company’s balance sheet

The “profits for distribution” transforms into “share capital” of equivalent value due to the bonus shares on the balance sheet.

Impact on the company’s EPS

Bonus shares cause the company’s Earnings Per Share (EPS) to be perceived as that of a much bigger company than before. Because the total issued shares increase with the bonus shares on the scene.

Impact on the company’s market capitalization

The increase in outstanding shares impacts the share price. As a result, the price of shares decreases for retail investors; they become much cheaper and more affordable.

Bonus share vs. Stock split

Comparing contrasting things can help us comprehend each of those things better. Looking at such shares vs. stock split, too, can be a useful way to ensure you understand each of them. So that’s what we will try to do in this section.

The difference between bonus shares and stock split

So, by now, you know that such shares are additional shares that a company distributes to its existing shareholders. But do you know what a stock split is? Like bonus shares, it, too, is a corporate action. But with this action, the company basically splits its outstanding share into multiple shares. That means the face value of each share decreases in proportion to the stock split ratio. This doesn’t happen in the case of bonus shares.

So bonus shares are mainly beneficial for existing shareholders. But stock splits work well for new shareholders, too.

The impact of each on shareholders and the company

Such shares are great for existing shareholders, as they do not have to pay extra charges. Meanwhile, the company too can secure its position if a cash dividend shortage occurs.

Stock splits, on the other hand, are suitable for existing as well as new shareholders. On the company front, one sees a division of outstanding shares in proportion to the increase in the number of shares.

Their suitability for a company’s capital structure

These shares and stock split are both beneficial for the company. They increase the company’s value in the long term, let people perceive it in a better light, increase the number of shareholders, and much more.

How to evaluate their suitability for your investment needs

The suitability of these shares and stock split depends on your investment horizon. If you are looking at short-term spot trading, then the fall in prices with both options is a bad thing. If you are willing to wait it out, though, the price fall is only likely to be temporary. So just make sure you pick a company with a solid reputation and past performance.

FAQs

What do you mean by bonus shares?

Bonus shares are additional shares distributed by a company to its existing shareholders at no extra cost. This increases the total number of shares held by shareholders.

Is bonus shares good to buy?

Investing in bonus shares can be advantageous. It increases the number of shares without extra cost, making it attractive for investors seeking to multiply their investment.

Who are eligible for bonus shares?

Existing shareholders are eligible for bonus shares. To qualify, they must hold shares before the ex-date; buying shares on the ex-date disqualifies them.

What is 2:1 bonus share?

In a 2:1 bonus share, shareholders receive two additional shares for every one share held. It’s a ratio indicating the number of bonus shares distributed.

Disclaimer: Risk is fundamental to the investment process in Indian stocks. Any discussion of securities in this article should not be considered a recommendation to buy or sell any security. The facts provided are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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