What are Bonus Shares?

As we are going through corporate actions one by one every week, this week we will learn about another important or we can say rewarding corporate action i.e. Bonus shares. Bonus shares are like gifts that companies give to their existing shareholders. It's a way of saying "thank you" for being part of the company. You have understood about dividend in earlier weeks, today we’ll learn about how bonus can act as a dividend, now dividend is received in cash and bonus share received in the form of shares. If you haven’t read that blog yet, then click here. So, let’s dive into the various aspects of bonus shares.

What is a Bonus Share?

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns.

The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding. For instance, if Investor A holds 200 shares of a company and a company declares 2:1 bonus, that is for every one share, he gets 2 shares for free. That is total 400 shares for free and his total holding will increase to 600 shares.

Now, could there be different types of bonus shares, for that let us understand various types of Bonus Shares:

1. Fully Paid Bonus Shares
Fully paid bonus shares are those shares that are distributed at no extra cost in the proportion of the investors holding in the company. This enables the company to reward shareholders without depleting its cash reserves. 

2. Convertible Bonus Shares
These can be converted into equity shares after a specified period.

Now, are there any important dates to remember, so the answer is yes

1. Ex-Bonus Date
The ex-bonus date is the date on which the stock starts trading without the bonus entitlement. If an investor purchases shares on or after the ex-bonus date, they won't receive the bonus shares. 

2. Record Date
Shareholders registered on the company's books as of the record date are eligible to receive bonus shares. Investors who acquire shares after this date will not be entitled to the bonus.

Here are few examples of the companies which had issued bonus share in 2023:

Why does Company give Bonus shares?

1. Rewarding Shareholders
Bonus shares serve as a way for companies to reward existing shareholders, fostering loyalty and maintaining a positive relationship with investors. 

2. Improving Liquidity
By increasing the number of outstanding shares, bonus issues can enhance stock liquidity, making the shares more attractive to a broader range of investors. 

3. Signalling Financial Health
Issuing bonus shares can be seen as a signal of the company's confidence in its financial health. It reflects that the company has accumulated sufficient reserves to distribute among shareholders.

Advantages of Bonus Shares to Shareholders:

1. Investors do not have to pay any tax while receiving bonus shares from the company. 

2. Bonus shares are considered beneficial for long-term shareholders of the company looking to multiply their investment. 

3. Bonus shares are free of cost to shareholders as they are issued by the company, which increases the outstanding shares of an investor in the company and enhances the liquidity of the stock. 

4. Bonus shares help build the trust of an investor in the company's business and operations because they have invested in the company and, in turn, gives capital to the investor.

In conclusion, Bonus shares play a significant role in corporate finance by rewarding shareholders, signalling financial strength, and improving market liquidity. While they don't directly impact the wealth of shareholders, understanding the types, dates, and reasons behind bonus share is important for investors who are trying to figure out what's going on in the ever-changing stock market. As with any investment decision, shareholders should consider their individual financial goals and the company's long-term prospects before reacting to bonus share announcements.

To understand more about such interesting concepts along with further interesting examples, check out my course on Basics of Stock Market.

Until next time !!!