Bonus shares are additional shares given to existing shareholders without any extra cost, based on the number of shares they already own. They are issued from a company’s accumulated earnings, effectively converting part of the company’s retained earnings into share capital.
Content Id:
- What Is Bonus Share?
- Bonus Share Example
- How Bonus Shares Are Issued?
- Who is Eligible for Bonus Shares?
- Types of Bonus Shares
- Advantages of Bonus Shares
- Disadvantages of Bonus Shares
- Top Bonus Share Giving Indian Companies
- Bonus Share Meaning – Quick Summary
- What Is Meant By Bonus Shares? – FAQs
What Is Bonus Share?
A bonus share is a free share of stock given to current shareholders by a company, typically from its retained earnings. They’re distributed in a fixed ratio to existing shares held, thereby increasing the total number of shares while maintaining the same ownership percentage.
Bonus shares are a corporate benefit issued to shareholders, symbolizing a company’s robust financial health. When a company accumulates substantial profits, it can convert part of these profits into share capital, issuing these as free shares to existing shareholders.
Issuing bonus shares increases the total number of shares in circulation without changing the overall value of the company. This action dilutes the share price but not the value of shareholders’ total holdings, maintaining their proportional ownership in the company.
For Example: A company issues 1:2 bonus shares. If you own 100 shares valued at ₹600 each, you receive 50 extra shares. Post-issue, the share price might adjust, but your total holding value remains similar.
Bonus Share Example
Imagine a company declares a 1:1 bonus share issue. If you own 100 shares, you’ll receive an additional 100 shares for free. Your total share count becomes 200, but the market price per share may decrease to maintain the overall market capitalization.
How Bonus Shares Are Issued?
Bonus shares are issued by converting a company’s accumulated profits or reserves into share capital. They’re distributed to existing shareholders in a specific ratio, like 1:1 or 2:1, based on their current holdings, without any cost to them, directly credited to their Demat accounts.
Who is Eligible for Bonus Shares?
Any registered shareholder of a company is eligible for bonus shares. Eligibility depends on owning the shares before the ex-bonus date, a predetermined cutoff date announced by the company. Shareholders on record by this date receive the bonus shares in proportion to their holdings.
Types of Bonus Shares
The main types of bonus shares are based on their source: reserves created from a company’s profits, or the capital redemption reserve. The distribution ratio, like 1:1 or 2:1, reflects how many bonus shares a shareholder receives per existing share held.
- Reserves-Based Bonus Shares: These are issued from the company’s accumulated profits or free reserves. The company converts part of its profits, which are not distributed as dividends, into share capital, distributing it to shareholders as bonus shares.
- Capital Redemption Reserve Bonus Shares: When a company buys back its shares, it may transfer an amount equivalent to the nominal value of the bought-back shares to a capital redemption reserve. This reserve can be used to issue bonus shares to shareholders.
Advantages of Bonus Shares
The main advantages of bonus shares include enhancing shareholder value without cash outflow, signaling company confidence and strong future prospects, improving the liquidity of shares, and maintaining proportional equity for shareholders, thus fostering a sense of loyalty and long-term commitment among investors.
- Shareholder Value Enhancement: Issuing bonus shares increases the total shares held by investors, enhancing their value in the company without any additional investment, and creating a perception of increased wealth.
- Company Confidence Signal: By issuing bonus shares from retained earnings, a company signals its confidence in future profitability and financial stability, positively influencing investor sentiment and market perception.
- Improved Share Liquidity: More shares in the market mean improved liquidity, making it easier for shareholders to buy and sell shares, thus potentially increasing market activity for the company’s stock.
- Proportional Equity Maintenance: Bonus shares maintain the existing shareholders’ proportionate ownership in the company, avoiding dilution of their holdings, and reinforcing their loyalty and long-term investment in the company.
Disadvantages of Bonus Shares
The main disadvantages of bonus shares include a possible dilution in earnings per share (EPS), as profits get distributed over more shares. This can lead to reduced dividend per share and might be perceived negatively if investors expect cash dividends.
- Dilution of Earnings per Share (EPS): As bonus shares increase the total number of shares outstanding, the same profits are distributed over more shares, potentially lowering EPS and affecting investor perception.
- Reduction in Dividend per Share: With profits spread across more shares, the dividend per share may decrease, impacting income for shareholders who rely on dividends for returns.
- Investor Expectations: Shareholders anticipating cash dividends might be disappointed by bonus shares, as they don’t offer immediate cash benefits, potentially affecting investor confidence and market sentiment.
Top Bonus Share Giving Indian Companies
Here we highlight the top 10 Indian companies with a strong record of distributing bonus shares. These companies include BPCL, Wipro, Infosys, ITC, GAIL (India), Dabur India, Samvardhana Motherson, Tata Consultancy Services, Indian Oil Corporation, and Oil and Natural Gas Corporation. They have consistently rewarded shareholders with bonus shares, reflecting their financial strength and commitment to investor returns.
Bonus Share Meaning – Quick Summary
- A bonus share is a complimentary stock given to shareholders by a company from its retained earnings. It’s allocated in a fixed ratio, increasing total shares but maintaining the same ownership percentage.
- Bonus shares convert a company’s profits or reserves into share capital, distributed to shareholders in a specific ratio, such as 1:1 or 2:1, based on their holdings, at no cost, credited to Demat accounts.
- Registered shareholders are eligible for bonus shares if they own shares before the ex-bonus date, a company-announced cutoff. Shareholders on record by this date receive bonus shares proportional to their holdings.
- The types of bonus shares stem from their source: reserves from company profits or capital redemption reserves. The distribution ratio, such as 1:1 or 2:1, indicates the number of bonus shares received per existing share.
- The main advantages of bonus shares are increasing shareholder value without cash outflow, signaling company confidence and bright future prospects, enhancing share liquidity, maintaining proportional equity, and fostering loyalty and long-term commitment among investors.
- The main disadvantages of bonus shares are potential dilution in earnings per share (EPS) and reduced dividends per share, as profits are distributed over more shares. This can negatively impact investors expecting cash dividends.
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What Is Meant By Bonus Shares? – FAQs
Bonus shares are additional shares given to existing shareholders at no cost, based on their current holdings. They’re issued from a company’s reserves or accumulated profits, increasing the total share count without altering ownership percentages.
Bonus shares are calculated using a specific ratio, like 1:1 or 2:1, applied to existing shares held. For instance, in a 1:1 ratio, one bonus share is given for every share owned.
Bonus shares primarily benefit existing shareholders, who receive additional shares at no cost, proportionate to their current holdings. This can enhance their investment value without diluting ownership percentage in the company.
Bonus shares are credited to shareholders’ accounts after the ex-bonus date, a specific cut-off announced by the company. This process usually takes a few days to a week post the ex-bonus date.
Yes, you can sell bonus shares. Once credited to your account, they are treated like regular shares. However, there may be a lock-in period or specific conditions set by the company or market regulations.
After issuing bonus shares, the company’s share capital increases while the stock price typically adjusts to reflect the additional shares. For shareholders, their total number of shares increases without altering their ownership percentage.
