What Are Bonus Shares?

Gaining a bonus or getting something for free is satisfying for consumers worldwide. Bonus shares enable that feeling in the finance sector. You can create a Demat account and generate bonus shares to increase your earnings. Demat accounts, after all, allow trading and investing from a person’s home. A Demat account is essential to hold securities directly in electronic format. It will help you invest in shares on the stock market. It is also known as a dematerialized account.

Current shareholders get bonus shares at no extra cost. It depends on how many shares they currently own. These are the bank’s accumulated earnings that are transformed into free shares rather than distributed as dividends. The fundamental idea of bonus shares is to increase the cumulative number. It also maintains a fixed ratio of shares held. 

Descriptive Examples

For example, if Investor Y owns 200 shares of a company, and the company announces a bonus in the proportion of 4:1, then they would receive four shares for free. That is a sum of 800 free shares, and his total ownership will increase to 1000 shares. 

You can consider one more example. A shareholder would receive two extra shares for one ordinary share. This process happens if a company announces a one-for-two bonus share. Say a shareholder owns 2,000 company shares. When the business develops bonus shares, she will now own 1000 bonus shares, as 2000 x 1/2 = 1,000! 

The terms “ex-date” and “record date” are important to understand policy and benefits. Below are the instruments used when the company announces its shares to its shareholders.

• Record Date

A record date is a time set by the company for bonus share eligibility. The company will grant shares to shareholders with shareholdings in their Demat accounts. The execution of shares will occur on the recorded date.

• Ex-Date

The record date is one day earlier than the expiration date. In this case, an investor must purchase the shares at least one day before the expiration date. This practice helps in qualifying for bonus shares.

Who Qualifies to Receive Bonus Shares?

Companies issue bonus shares to promote retail participation and broaden their equity base. It is challenging for new investors to buy shares of one company when the per-share price is high—a higher share count results in a lower cost per share. But, despite the declaration of bonus shares, the total capital stays the same.

The company may issue bonus shares to shareholders who held the company’s shares before the record date and the expiration date. The T+2 rolling system, where the record date is two days after the ex-date, is followed in many countries for delivering the shares. If you are an investor, you must buy shares before the expiration date to qualify for bonus shares. If you purchase shares after the expiration date, the business will not transfer ownership of the claims.

Once the bonus shares are accounted for, you will receive a unique ISIN. Bonus shares will be credited to the shareholder’s account within 15 days.

What Justifies a Company Issuing Bonus Shares?

If a company incurs profits during this period but cannot pay dividends to present shareholders due to a lack of funds, it may issue bonus shares. Relevant companies distribute bonus shares from their earnings. This is also known as the “capitalization of profits.”

Let us now think about the benefits and drawbacks of bonus shares.

Benefits of Bonus Shares

• Investors who buy bonus shares receive several benefits. Some of these are listed below. 
• Bonus shares give investors extra shares. This includes increasing their stake in the business and the stock’s liquidity. 
• Bonus shareholders are not troubled by any tax effects because there are none. 
• They are especially beneficial for those looking to make long-term investments. It is because they strengthened earnings across a wider spectrum. 
• Individuals who own bonus shares can receive a larger dividend. This is possible when the firm declares dividends. It is because they now own a larger proportion of the company’s shares.

Demerits of Bonus Shares 

Possessing bonus shares presents a few disadvantages too. They should be aware of bonus shares. It is because even though the financial gain will remain the same, there will be more of them since the earnings per share will decrease.

From the Company’s Perspective:

1) The business does not get any cash when issuing bonus shares. As a result, it becomes harder to raise money after an offering.

2) The incentive price rises over time. It grows when a company issues bonus shares rather than paying dividends.

Types of Bonus Shares

There are two types of bonus shares, which are as follows:

Paid-In-Full Bonus Shares

Bonus shares are securities that are given out to investors based on how much ownership they have in the company. The entities that may issue these bonus shares include:

• A loss and profit account.
• Financial resources.
• Reserves for capital redemption.
• A premium security account. 

Bonus Shares with Partial Payments

A portion of the total issue price is paid. The investor can buy partially paid shares without paying the full issue price.

One can pay off the remaining partially paid share capital balance in installments.

Guidelines That a Company Must Adhere to Before Authorising Bonus Shares

1. Once bonus shares are issued, the articles of association must approve a ‘bonus issue. The company must adopt a special resolution at their meetings. This is a concern if an organization’s regulations cannot do what’s needed.
2. In the event of a meeting, the shareholders must also approve the bonus issue.
3. One should adhere to the SEBI guidelines.
4. The business must ensure certainty after a bonus issue. It should ensure that the share capital stays within the authorized share capital. The Memorandum of Association’s capital clause needs amending by raising the authorized money.
5. A business must notify the Federal Bank and get permission before issuing bonuses.
6. Before the issue date, a company should pay the bonus shares. The shareholders will pay the uncalled amount if claims come in part.

Conclusion 

It is common practice to give existing shareholders bonus shares in order to meet their cash needs. Instead of issuing new shares, bonus shares do not increase the company’s profits.

Access an open Demat account immediately to start trading and investing in stocks. You can also earn bonus shares! It is crucial to conduct adequate research before making buying decisions about securities. This early research can lower your risk of suffering losses. It will also save one from other negative outcomes. Along with it, this increases your opportunity for profit. 

For trustworthy financial guidance, Piramal Finance is here for your service. We are an Indian financial services company specializing in retail lending. With a skilled set of professionals, our services include several options. Services include personal loans, business loans, housing loans, and other consumer-focused finance products.