scorecardresearchWhat are bonus shares? All you need to know

What are bonus shares? All you need to know

Updated: 06 Sep 2022, 02:32 PM IST
TL;DR.
When a firm is unable to pay its employees, it is common for the company to give out free shares to them as bonus, which they can sell to meet their financial requirements. Read on to know more about it.
Bonus shares are free shares given to current shareholders by the firm.

Bonus shares are free shares given to current shareholders by the firm.

When you invest in a business by acquiring its shares, the firm may periodically reward you with dividends. Dividends are the earnings earned by a firm that are distributed to its shareholders. However, corporations may opt to reward their shareholders in methods other than dividends on occasion. A bonus issuance of shares is one such method. Let us try to figure out what it is.

What are bonus shares?

Bonus shares are free shares given to current shareholders by the firm. Bonus shares are distributed in proportion to the number of shares held by an investor.

When a firm provides 1:5 bonus shares, for example, it implies that for every 5 shares purchased, the shareholder will receive 1 free share. As a result, if an investor owns 100 shares at the time of the bonus, his or her holdings will increase to 120 shares.

The firm generally announces bonus shares with a record date, which is the day on which the bonus shares are calculated. Bonus shares are available to all investors who held shares on the record date. They are generally given as a substitute for dividend distributions.

Who is eligible to receive bonus share?

Through the record date, companies determine who is eligible to earn bonus shares. After the announcement of a bonus share issuance, trading stays open, with new shareholders being added and withdrawn every minute.

How do firms determine the identity of current shareholders, given the continuously changing number of shareholders?

Companies that plan to distribute bonus shares set a record date to establish how many current shareholders there are. To be eligible for bonus share allocation, you must be a shareholder on the record date.

The company's bookkeepers review the records on the record date to identify stockholders. When a company declares a bonus share issuance, it also announces an ex-date. The ex-date is the final day to acquire the company's stock in order to be eligible for a bonus share issuance. Anyone who joins the company after the ex-date is not eligible for bonus shares.

T+2 rolling settlement is used in India, which implies the ex-date is two days prior to the record date. To become a shareholder before the record date and be eligible for a bonus share issuance, you must purchase a company's shares at least a day before the ex-date.

We understand that bonus share offerings are a key aspect of increasing shareholder liquidity. The advantage of a dividend is immediate and in the form of cash, but the benefit of a bonus share issuance is indirect.

What if an investor wishes to cash in on the extra shares?

To sell the bonus shares, he or she will have to wait for them to appear in the demat account. It is not enough to be an eligible shareholder on the record date or hear about a bonus share issue to be entitled to sell the shares.

When are bonus shares credited to the demat account?

Instant money transfers have become the norm with the introduction of electronic media. Similarly, because shares are now exchanged in electronic or dematerialized form, the time it takes for bonus shares to be credited to a demat account has significantly decreased.

Once a shareholder is verified as being qualified for a bonus share issue, the bonus shares are given a new ISIN (International Securities Identification Number). It takes no more than 15 days for the bonus shares to be deposited to the shareholders' demat accounts when a fresh ISIN is assigned.

You do not have to do anything as an investor to get bonus shares. In reality, the company's bonus shares are immediately deposited to the demat accounts of the company's owners. Although the time it takes for firms to credit bonus shares to shareholders' demat accounts is specified as 15 days, owing to the totally dematerialized and electronic form of share transfers, it is generally credited considerably sooner.

Investors wanting a steady income seek out shares of firms that offer bonus shares on a regular basis. The investor community as a whole favours regular bonus share offerings since the share price frequently improves after the issuing of bonus shares.

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Understanding bonus shares
First Published: 06 Sep 2022, 02:32 PM IST