What is Bonus Share?

Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are the company’s accumulated earnings which are not given out in the form of dividends but are converted into free shares.

What is a Bonus Issue of Share?

A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout.

It can be two reasons:-

1. Investing for the long term.
2. Generating an annual income.

Bonus shares are issued according to each shareholder’s stake in the company.

For example,

A three-for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).

Eligibility for Bonus Shares

The eligibility for bonus shares depends on the record date and ex-date of the shareholders.

What is Record Date?

The issuing company fixes a particular date when the investor must own shares in order to be eligible to participate in corporate events like receiving dividend, bonus shares etc. This is called record date.

What is Ex-Date?

The ex-dividend date for stocks is usually set one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. This means anyone who bought the stock on Friday or after would not get the dividend.

In India, the delivery of shares into a Demat account takes place after 2 days from the trading date. All existing shareholders before the ex-date and record date are eligible to receive bonus shares issued by a company. However, to qualify to receive bonus shares, the company stocks must be bought before the ex-date.

Any stocks bought on the ex-date shall not be eligible for an issue of bonus shares as the ownership of the stocks cannot be gained by the investor before the record date.

 

 

Advantages

1. No tax on Dividend income.
2. Important for long term investment.
3. Increase the investor’s belief in operations.
4. Investment receives more in case company.
5. Company can conserve cash.
6. Give positive sign to market.
7. Increase the participation of small investors.
8. Increases the percentage of company’s size.

Disadvantages

1. Bonus shares sale reduces the stake in company,
2. Does not give extra wealth to investor.
3. Increase in number of share decrease the EPS and cash dividend yield.
4. Company’s ability to raise cash reduces.
5. Cost of administering the bonus share is more than paying cash dividend.

Types of Bonus Shares

There are two different types of bonus share are:-

1. Fully paid bonus shares
2. Party – paid up bonus shares

Fully paid bonuses share:-

Fully paid bonus shares are those shares that are distributed at no extra cost in the proportion of the investors holding in the company.

These types of bonus shares can be issued from the following sources:-

1. Profit and loss account
2. Capital reserves
3. Capital redemption reserves
4. Security premium account

Party – paid up bonus shares:-

Before understanding party-paid up bonus shares, let’s understand what a partly-paid share is?
A partly paid share is a share in a company that is only partially paid compared to the full issue price. It means that the investor can buy partly paid shares without paying the total issue price.
However, the remaining amount for partly paid shares can be paid in installments when the company makes calls.
So when the bonus is applied in the partly-paid shares and converted into fully paid shares without calling out the uncalled amount through profit capitalization, it is called partly-paid up bonus shares.

Funds which can be used for issuing bonus shares:-

A company may issue fully paid-up bonus shares to its members, out of only:-

• Its free reserves;
• The securities premium account;
• The capital redemption reserve account.

The bonus shares are generally issued in a ratio i.e. for instance, if an investor holds 100 shares of a Company and a Company declares 2:1 bonus offer that would mean that the investor would get 2 shares for every 1 share held by him in such Company. Therefore, he will get 200 additional shares as per this example and his total shareholding in the Company would be increased to 300 shares. 

Process for share bonus issue

Step 1: Sending notice and agenda items to the Directors to hold board meeting as per Secretarial Standard-1.

Step 2: – Holding Board Meeting to decide and for sending notice for convening general meeting.

• Pass Board Resolution and decide ratio and quantum for such issue.
• Issue notice for general meeting attaching explanatory statement thereto and in compliance to Secretarial Standards-2.

Step 3: Holding general meeting 

• Passing Special Resolution approving the issue of bonus shares.
• File eForm MGT-14 within 30 days of passing special resolution.

Step 4: Issue of bonus shares and pass board resolution for allotment of such shares.

Step 5: File eForm PAS-3 within 30 days of passing of resolution of allotment by the board.

Step 6: The Company shall issue the share certificates to members to whom a bonus share has been issued within two months from the date of allotment.

Conclusion

Once a new ISIN (International Securities Identification Number) is allocated to the bonus shares, they are credited into the shareholder’s Demat account within 10-15 days. Shareholders shall receive an SMS or Email about the credit of bonus shares into their Demat account or shareholders can directly login to their online Demat accounts to check their statement that reflects the delivery of bonus shares on a given day.