You must have heard that XYZ company is issuing bonus shares to its shareholders. But what does that mean? Why is the company issuing more shares, do these shareholders will have to pay more money to get these shares? Let's answer all these questions.
Bonus shares are basically additional shares issued by a company to its pre-existing shareholders. These are fully paid shares and the shareholders do not have to incur any extra costs to get them. The number of bonus shares you receive depends on the number of shares of the firm you already hold.
So why does a company then issue these free, additional shares?
This is mostly done to increase the liquidity of the stock. When the price of a share is high, a number of retail investors may find it difficult to buy that share. By issuing bonus shares, the total number of shares of the firm increases, thus reducing its stock price and making it accessible to more investors. With more shares in the market at a low price, the liquidity and investor engagement of the shares improve considerably.
A number of times, companies also issue bonus shares when they do not have enough cash to pay dividends to the shareholders despite a profit. It is also done by some firms to avoid paying high dividend distribution tax. In place of a dividend, which is regularly given, it issues extra shares to its investors as a bonus.
So how does it work?
The company issues these shares in a particular ratio. Suppose a 1:1 bonus issue is announced. It means for everyone shares a person holds, he/she will get one additional share. Say you hold 20 shares in a firm and it issues a 1:1 bonus share, you will receive 20 extra shares in your Demat account.
Similarly, suppose a firm has announced a bonus share of 4:1, then for every 1 share, the shareholder will receive 4 more. So if you own 20 shares, you will get 4*20 which is 80 additional shares.
Who is eligible?
All shareholders who own shares of the firm before the ex-date, which is determined by the firm, are eligible for bonus shares.
When announcing a bonus issue the company also informs the shareholders regarding a record date. It is the cut-off date set by the company.
India follows a T+2 rolling system, which means the ex-date is 2 days before the record date. An investor, if he/she wants to be eligible for the bonus issue must buy shares before the ex-date. anyone who buys the stock on the ex-date will not be eligible for this.
The bonus shares are then credited to the shareholders' accounts within fifteen days after a new ISIN (International Securities Identification Number) is assigned to them.
Companies that have issued bonus shares
Over the years a number of blue-chip firms like TCS, Infosys, Reliance Industries, HDFC Bank, M&M, ONGC have issued bonus shares for their investors.
Most companies do not give out bonus shares very often but 2017 was one year where 5 Nifty50 stocks issued bonus shares, which was the highest in 11 years. These were L&T, BPCL, ICICI Bank, Wipro and GAIL.
Since 2017, 10 firms including Infosys, TCS, GAIL, Oil India, IOC, HCL Tech, Britannia, UPL, NTPC, and Wipro have announced bonus issues.
Before 2017, 2006 was the year of the highest number of bonus shares issued by Nifty50 stocks - 7.
Among Nifty50 stocks, in the last 10 years, Infosys, Wipro and BPCL have given 3 bonus issues each. Meanwhile, ITC, GAIL, IOC, HCL Tech, L&T, ONGC, Britannia have given 2 each.