What are Bonus Shares?

As a new-age investor, you must be aware of the fundamentals of the stock market before starting your investment journey. Along with having a grasp of the market dynamics, you must know about the key concepts of stock markets. One such crucial aspect is knowing about corporate actions, which are decisions taken by the companies listed on the stock exchange. These can be issuing dividend rights, split stocks and bonus shares.

A bonus share is a free additional share which is given to the shareholders as a bonus. Before you start trading in stock markets, you are compulsorily required to open a Demat Account and a Trading Account. Always remember that opening a Demat Account with a trusted and reliable stock broker will provide you with manifold benefits, and help in making wise investment decisions.

Understanding bonus shares issue:

Bonus shares issue is also known as:

  • Bonus issue
  • Scrip issue
  • Capitalisation issue

These are additional shares given to shareholders without any charges. For instance, if a company notifies 1:2 bonus issue, it means that the shareholders will receive two additional shares for one existing share. So, a shareholder having 100 existing shares will now have additional 200 shares, taking the total number of shares to 300.

Implications of bonus issue:

  • Bonus share issue is a corporate action to revamp the existing cash reserve of a company. It brings the employed capital of the company in sync with the issued capital. If a company makes profit, it results in an increase in its employed capital. This surplus is distributed through increasing the number of issued shares, also known as issued capital.
  • A bonus share issue does not impact the net assets of a company. It does not involve any cash flow. It simply means that the number of shares issued by the company – called share capital – has increased.
  • Bonus share issue impacts the Earning per Share (EPS), which is calculated by dividing a company's net profit by the number of owned shares. A decrease in EPS, however, is compensated in the long-term by a corresponding increase in the number of owned shares.
  • Typically, a bonus share issue underlines the sound financial health of the company. It reflects that the company is in a strong position to issue additional equities. It means that the company has made profits.

Eligibility for bonus issue:

  • After announcing a bonus issue, a company simultaneously announces the date of issuance of bonus shares, which is known as the record date. All existing shareholders on the record date are eligible to receive bonus shares.
  • You must also know about the terms ‘Cum-Bonus’ and ‘Ex-Bonus’ with regards to bonus shares issue. The bonus shares between the date of announcement of bonus issue and record date is known as ‘Cum-Bonus’, while the status of bonus shares post-issuance on the record date is known as ‘Ex-Issue.’

Bonus issue and taxation:

As an investor, you must understand the tax implications on a bonus issue. According to the relevant provisions of the Income Tax Act, 1961, there are no tax implications on a bonus issue for shareholders in the particular financial year. This means that you don’t have to pay taxes for receiving the bonus shares. However, the gains, if any, made for trading in the additional shares are categorised as capital gains, and taxed accordingly.

Bonus issue - Guidelines to be followed by companies :

  • Before bonus issue the company has to follow the guidelines listed below:
  • The company’s Articles of Association (AoA) must have the provision for bonus shares issue.
  • The resolution for bonus shares issue must be passed in the company’s annual general meeting. It must be recommended by the board of directors, and then sanctioned by the shareholders.
  • The stock exchange should be informed about the impending bonus shares issue.
  • If the bonus issue is being made to Non-resident Indians (NRIs), permission is required from the Reserve Bank of India (RBI).
  • The company must adhere to the exhaustive regulations prescribed by Securities Exchange Board of India (SEBI) before bonus issue. As per the rules, a bonus issue can only be made from the company’s free reserves, and the total share capital cannot be more than the authorised share capital.
  • As per the rules, the company can only issue fully paid-up shares as a bonus issue.
  • In the case of the company having availed loans, permission is required from the particular financial institution.

Conclusion:

Thus a company can issue bonus shares to its shareholders to share its accumulated earnings. Not only does bonus issue strengthen a company’s equity base, but also increases retail participation in its shares. As an investor you stand to gain if the company announces a bonus issue. Before starting to invest in company shares, you must mandatorily have a Demat Account. Opening a Demat Account with a trusted financial partner can provide access to a slew of benefits, like free AMC charges, seamless trading platforms and consolidated market research reports.

Open Demat Account at IIFL