Bonus Shares of Companies: Meaning, Types and Benefits

Ever wondered why some companies give you extra shares without asking for more money? These are bonus shares. These are additional shares that companies provide to their existing shareholders without additional investment. 

While they do not generate immediate tax liabilities or income, they can significantly impact your investment portfolio over time. Learn in detail about bonus issues here to make informed decisions while investing in stocks. 

Quick Heads up

• Bonus shares or extra shares are issued to existing shareholders.
• Price per share is lower for bonus shares while the total value remains unchanged. 
• There is no immediate taxability.
• No cash outflow or additional investment.

Bonus Shares Meaning

When shareholders get additional shares in a specific proportion, these are termed bonus shares. For instance, if a company announces 4:1 bonus shares for each shareholder, the shareholder will receive 4 additional shares for each share they hold. If he/ she holds 10 shares of a company, he/ she will receive 40 shares for the 10 shares held.

Types of Bonus Shares

There are two key types of bonus shares you should know:

Fully Paid Bonus Shares

In the case of fully paid bonus issues, shareholders do not have to pay additional costs. These shares are issued from profit and loss accounts, capital redemption reserves, capital reserves and security premium accounts. 

Partly Paid Bonus Shares

Partly paid shares are where the shareholder pays a part of the issue price initially, and the remaining amount in instalments. When a company issues partly paid bonus shares, they are converted into fully paid bonus shares, wherein the shareholder gets the additional shares. 

Difference Between Bonus Shares and Stock Splits

Here are the differences between a bonus issue and a stock split:

Important Dates in Bonus Issue of Shares

Here are the important dates pertaining to the bonus issue:

1. Announcement Date: The date on which a company announces the allotment of bonus shares.
2. Record Date: The date on which the company lists eligible shareholders to receive bonus shares.
3. Ex-bonus Date: This is the last day when you can buy the company’s shares to be eligible for bonus shares. It is two business days prior to the record date.

Eligibility Criteria for Bonus Shares

To be eligible for bonus shares, you must be a shareholder on or before the record date set by the company. In India, the stock market follows a T+2 settlement cycle, meaning it takes two trading days for a share purchase to be reflected in your demat account. 

Therefore, you must purchase the shares at least one day before the ex-date, which is typically two days before the record date. If you buy shares on the ex-date, the ownership will not be settled in time, and you will not be eligible for the bonus shares.

Pros of Bonus Shares for Companies and Investors

Here are the pros of a bonus issue for companies and investors:

Pros for Companies

A company can reap the following benefits of a bonus issue:

• Share Capital Enhancement: Bonus issues increase share capital without cash outflow, rewarding shareholders by issuing extra shares proportionate to their holdings.
• Improved Liquidity: An Increase in the share volume ensures higher liquidity in trading shares with increasing demand for shares. 
• Increased Market Capitalisation: Even though a bonus issue does not increase market capitalisation, it creates avenues to increase market capitalisation through multiple trading opportunities.  
• Improved Company Image and Trust: Issuing bonus shares signals financial strength and boosts shareholder confidence and loyalty.

Pros for Investors

The following are the benefits for investors:

• No Outflow of Cash: Investors benefit from increased shares for trading without any additional investment or cash outflow.
• Price Adjustment: Even though the price of a share might decrease, overall investment value remains unchanged, providing an eagerness to continue.
• Increased Size of Portfolio: Investors can enjoy a large portfolio size with an increased number of shares available.
• Participation in Growth: Investors can participate in the growth of the concerned company with bonus shares, as these are issued when a company performs well. 
• Tax Efficiency: Investors can enjoy tax benefits such as deferred tax until they sell the shares. This is more beneficial than receiving cash dividends.

Cons of Bonus Shares

Here are the cons of a bonus issue:

• Lack of Additional Income: No additional money can be raised as they are additional shares.
• Demotivation for Investors Looking for Dividends: If you are an investor looking for dividends, you might not enjoy the benefits of a bonus issue, as in such a case, dividends are not declared.
• Reduced Earnings Per Share: As these are additional shares, the price per share might decrease for investors and the company, leading to lower incentives in trading.

Final Words

While bonus shares may not offer immediate income like dividends, they can be a smart long-term benefit for investors. Although the price per share may adjust, the overall value and market capitalisation potential often rise, making bonus shares a strategic advantage for patient investors.

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