Equity shares represent ownership in a company. Equity shareholders may receive a share in the earnings of the company based on the payout method that the directors decide. The management may opt to reward the equity shareholders with dividend or in some cases with bonus shares. A bonus issue, just like dividend payout, is a form of profit-sharing.

What are Bonus Shares?

Bonus shares are complimentary, fully paid shares issued to the existing shareholders of the company, based on the proportion of their current holding. Bonus shares are paid out to shareholders from the free reserves of the company. Free Reserves are nothing but accumulated profits of the company available for distribution. A bonus issue is usually expressed in the form a fixed ratio like 1:1 means 1 bonus share for every share held or 1:2 means 1 bonus share for every 2 shares held.

Implications of Bonus Issue

A direct impact of a bonus issue is that it increases the total issued capital base of a company and leads to a reduction in the balance of free reserves. It is observed that since a bonus issue does not increase the funds of a company, it could negatively impact the future possibility of dividend payout. It results in a pro-rate decline in the share price, making the share more marketable. The EPS of the company also falls based on the ratio of bonus shares issued.

Who is Entitled to Receive Bonus Shares?

All the existing investors holding shares of the company as on the “record date” are entitled to receive bonus shares on their current shares. The record date is the last date before which a person must become a shareholder and thus own shares of the company to be entitled to bonus shares. Therefore, a recipient of bonus shares must be a shareholder of the company as on the record date.

In India, we adhere to the T+2 settlement system, which means that delivery of shares takes place after two working days from the transaction date. “Ex-date” is usually set one day before the Record date. In order to be eligible for bonus issue, shares must be bought at least one day before the Ex-date so that the stocks get delivered to the Demat account on or before the Record date.

Thus, a bonus issue lets a company distribute profits to its shareholders without disturbing its cash balance.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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