Introduction

In the dynamic world of stock markets, terms like bonus shares frequently emerge, offering both intrigue and confusion for investors. This guide will provide you with a thorough understanding of bonus shares, including what they are, their advantages, and how they work. Additionally, we will explore how bonus share compare to stock splits and look at real-life examples to solidify your knowledge. By the end of this article, you’ll be equipped with the insights needed to make more informed investment decisions.

What is Bonus Share?

Bonus shares are additional share that a company issues to its existing shareholders without any extra cost. These shares are distributed proportionally to the number of shares already held by the shareholder. For instance, if a company declares a 1:2 bonus share, shareholders will receive one new share for every two share they own.

How Bonus Share Works

Understanding the mechanics behind bonus share is essential for investors:

Bonus Share Ratio:

The ratio, such as 1:2 or 3:5, indicates how many new share are issued for a certain number of existing share. In a 1:2 ratio, shareholders receive one additional share for every two shares they own.

Eligibility and Record Date:

Shareholders eligible for bonus share are determined by a record date set by the company. If you hold share before this date, you qualify for the bonus share. The ex-date, typically a day before the record date, marks the point when new buyers are not entitled to the bonus share.

Issuance Process:

After the company’s board and shareholders approve the bonus issue, the share are distributed. This process includes an announcement that details the record date, bonus ratio, and the rationale for the issuance.

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Why Companies Issue Bonus Shares

Companies have strategic reasons for issuing bonus shares:

1. Increase in Shareholder Confidence: Distributing bonus share can enhance trust among shareholders. This gesture reinforces their confidence in the company’s future growth and stability, fostering a positive market sentiment.

2. Conservation of Cash Flow: Instead of distributing cash dividends, companies issue bonus share, allowing them to reinvest profits into growth, debt repayment, or new projects. This helps maintain liquidity while still rewarding investors.

3. Improved Stock Liquidity: An increase in the number of shares often results in higher trading activity, making the stock more liquid and attractive to investors. Greater liquidity can lead to tighter bid-ask spreads and more stable prices.

Advantages of Issuing Bonus Shares

Understanding the advantages of issuing bonus shares highlights why many companies adopt this strategy:

Enhanced Investor Perception: Issuing bonus share signals strong financial health. It shows that the company is confident in its future profitability and growth prospects.

Encouragement of Long-Term Holding: Shareholders who receive bonus share are more likely to hold their investments longer, anticipating future value appreciation.

Increased Market Capitalization: Bonus share can attract new investors, bolstering the company’s market presence. A larger number of shares can also improve the company’s visibility in the investment community.

Psychological Benefit: Many investors perceive bonus share as a reward, which can boost interest and lead to positive sentiment around the stock.

Disadvantages and Risks of Bonus Shares

While beneficial, bonus shares come with potential downsides:

Dilution of Earnings Per Share (EPS):

Although shareholders have more shares post-issuance, EPS decreases as profits are distributed over a larger share base. This can be a concern for profitability-focused investors.

No Direct Increase in Wealth:

Unlike cash dividends, bonus shares don’t increase a shareholder’s immediate wealth. The total value of the investment remains unchanged initially, as the share price adjusts to reflect the increased share count.

Market Volatility:

Announcing bonus shares can lead to stock price fluctuations. Some investors may see the move as positive, while others might perceive it as a potential distraction from financial issues.

Administrative Costs:

Though minimal, issuing bonus shares involves certain administrative and regulatory expenses.

You may also want to know Difference Between Bonus Issue and Stock Split

Bonus Shares vs Stock Splits

It’s important to understand the differences between bonus share and stock splits:

Definition: Bonus shares are new share issued to existing shareholders from a company’s reserves, while a stock split divides existing share into multiple parts, reducing the face value per share without changing share capital.

Mechanism: Bonus shares increase the total number of share, whereas a stock split changes the nominal value of each share. For example, a 2-for-1 stock split divides each share into two, reducing the share price but keeping the investment value the same.

Use Cases: Companies may use a stock split to make their shares more affordable without affecting share capital. Bonus shares, on the other hand, are often used to reward shareholders and signal confidence in financial health.

Investor Impact: Both strategies increase the number of shares owned, but only stock splits adjust the face value, making shares more accessible to a wider range of investors.

Companies Issuing Bonus Shares

Companies that issue bonus share do so to achieve various strategic goals. Here are some notable examples:

Reliance Ltd.: Issued a 1:1 bonus share, doubling its share count. This move boosted investor confidence and increased trading volume.

Bajaj Steel: Offered a 3:1 bonus share ratio, helping retain shareholder loyalty and enhancing stock trading activity.

Worth Investment & Trading Ltd.: Used a bonus issue to highlight strong performance, which temporarily drove up the stock price before stabilizing.

NBCC: Issued a 1:2 bonus share to demonstrate consistent growth, which improved investor morale and trading volume.

Aurangabad Distillery Ltd.: Leveraged a 1:4 bonus issue to showcase solid earnings and strengthen its market reputation.

How to Bonus Shares Calculation.

Bonus shares Calculation is straightforward:

Example Calculation: If a company announces a 1:2 bonus share, a shareholder with 100 shares will receive 50 additional share. The formula for calculation is:

Number of Bonus Shares = Existing Shares × (Bonus Ratio Numerator / Bonus Ratio Denominator)

Using the example above:

50 = 100 × (1/2)

Illustrative Example with Financial Data: Suppose a shareholder owns 500 shares priced at ₹200 each. If a company issues a 1:1 bonus share, the shareholder receives an additional 500 share, making the total share count 1,000. Post-issuance, the share price adjusts to approximately ₹100, keeping the overall investment value at ₹100,000. This example demonstrates how the total worth remains consistent while the number of shares increases.

Upcoming Bonus Shares and Market Trends

Keeping an eye on upcoming bonus shares can offer investment opportunities. Companies often announce bonus share issues during their annual general meetings (AGMs) or as part of strategic growth plans. A comprehensive bonus share list is essential for investors seeking to capitalize on these opportunities. Staying updated with financial news and company disclosures helps identify which firms are planning to issue bonus share and their potential impact on market dynamics.

Example of Recent Announcements:

In 2024, several tech and manufacturing companies have announced bonus shares as part of their strategic plans. Monitoring such trends can provide early entry points for investors looking to take advantage of market reactions.

Tax Implications

Bonus shares are not taxable at the time of issuance but can affect capital gains when sold. The acquisition cost for bonus share is considered zero, which may result in higher capital gains tax upon their sale.

Capital Gains Calculation:

If an investor sells bonus share acquired at no cost, the entire sale price is subject to capital gains tax. For example, if the bonus shares are sold at ₹150 each, the profit per share is ₹150, which will be used to calculate the capital gains.

Tax Strategy Considerations:

Investors should plan their portfolio and tax strategy accordingly to manage potential capital gains tax impacts when selling bonus shares.

Case Studies of Bonus Share Issuances

Real-world examples provide insights into how bonus share impact companies and investors:

Reliance Ltd.: Their 1:1 bonus share issuance increased trading volume and generated positive market sentiment. Investors saw this as a sign of robust growth, encouraging further investments.

Bajaj Steel: The 3:1 bonus share distribution kept shareholders engaged and maintained the stock’s trading momentum, reinforcing the company’s image as a shareholder-centric entity.

NBCC: The 1:2 bonus share issuance led to increased trading activity and showcased the company’s growth trajectory. This move was seen as a confidence booster for long-term investors.

International Examples: Global companies like Apple and Microsoft have also used bonus share distributions to reward shareholders and project growth confidence. Apple’s history of stock splits and bonus-like distributions has often led to an increase in shareholder loyalty and market activity.

Conclusion

Bonus shares are a strategic tool used by companies to reward shareholders and signal strong financial health. By understanding how they work, their advantages, and potential downsides, investors can make well-informed decisions. Whether comparing bonus shares to stock splits or evaluating the long-term impact on investment portfolios, knowledge of bonus shares offers a valuable edge.

For personalised investment guidance and insights, reach out to experts like Jainam Broking Ltd. Their expertise can help you stay informed and make the most of bonus share opportunities in your investment journey.

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