What are Bonus Shares?
Bonus shares are additional free shares given to existing shareholders based on the number of shares they hold. The company’s accumulated earnings are converted into free shares rather than dividends.
For example, if a company provides one bonus share in exchange for two existing shares, an existing shareholder will receive one additional share in exchange for two existing shares.
Assume that one of the company’s shareholders has 2,000 shares. When the business issues bonus shares, he will receive 1,000 bonus shares (2,000 * 1/2 = 1,000).
When a corporation offers bonus shares to its shareholders, the terms “record date” and “ex-date” are employed. Consider the following definitions of the terms “record date” and “ex-date”
What is the date of the record?
The record date is the corporation’s cut-off date for bonus share eligibility. All shareholders with shares in their Demat account on the record date will get bonus shares from the corporation.
What is Ex-Date?
The record date is one day before the expiration date. An investor must acquire the shares at least one day before the ex-date to be eligible for bonus shares.
The following are the two types of bonus shares:
- Fully paid bonus shares
- Partly paid bonus shares
Fully paid bonus shares
Fully paid bonus shares are those that are distributed in accordance to the quantity of stock held by investors at no additional cost.
- Bonus shares of this type can be obtained from the following sources:
- Profit and loss account
- Security Premium Account
- Capital Reserves
- Capital redemption reserves
Partly paid bonus shares
A partially paid share is one that has been paid only a portion of the full issue price. It indicates that an investor might buy partially paid shares instead of paying the full issue price.
The remaining money for partially paid shares, on the other hand, might be paid in installments when the firm makes calls.
In contrast to fully paid-up bonus shares, partly paid-up bonus shares cannot be issued through a capital redemption reserve account or a security account.
Benefits of Bonus Shares
From the Investor’s Point of View:
1) Investors are not required to pay any taxes, when they receive bonus shares from the corporation.
2) Long-term shareholders who desire to raise the value of their investment might benefit from bonus shares.
3) The company issues bonus shares to owners at no cost, increasing the number of outstanding shares of an investment and enhancing the stock’s liquidity.
4) Bonus shares increase an investor’s confidence in the firm’s business and operations by allowing them to participate in the company while also receiving funds.
From the company’s point of view
1) Issuing bonus shares increases the company’s value and enhances its market position and image, gaining the trust of existing shareholders and attracting a new generation of small investors to the stock market.
2) Companies have more free-floating shares as a result of the issuing of bonus shares on the market.
3) Bonus shares are issued to help companies get out of circumstances when they are unable or unwilling to pay cash dividends to their shareholders.