Bonus Shares Meaning and Benefits: Everything You Need to Know

Bonus shares act like a rewarding bonus to your investment portfolio, offering extra shares at no cost. They represent a way for companies to thank their loyal shareholders by increasing their share count, drawing from the company’s own reserves rather than requiring new investments.

This guide will help you understand the bonus shares meaning, the benefits they offer, and how they might impact your investments. Whether you’re looking to understand how bonus issue of shares fit into your overall strategy or simply want to learn more about their role in the stock market, this comprehensive overview is here to help.

What are Bonus Shares?

The term bonus in stock market refers to the issuance of bonus shares. The bonus shares meaning lies in the distribution of additional shares to existing shareholders without extra cost. It is a popular method for companies to distribute accumulated profits among shareholders and enhance market liquidity. For example, a 1:1 bonus issue means shareholders receive one additional share for every share they already own.

Although the face value per share is reduced proportionately, the total market value of the investment remains unchanged. The issuance of bonus shares does not involve fresh capital but redistributes existing reserves among shareholders. Understanding the bonus shares meaning is crucial for investors in India, as this method is popular for rewarding loyal investors.

Types of Bonus Shares

There are primarily two types of bonus shares:

1. Fully Paid-up Bonus Shares: These shares are given to shareholders at no cost, coming directly from the company’s accumulated reserves or share premium account. This is the most common form of bonus shares that highlights its meaning.

2. Partly Paid-up Bonus Shares: In this rare scenario, only part of the share’s value is provided free from reserves. Shareholders may need to pay the remaining amount later or forfeit the shares.

Why Do Companies Issue Bonus Shares?

Companies issue bonus shares for several reasons:

• Encourages Liquidity: By lowering the share price, bonus issues make shares more affordable, attracting more retail investors.
• Rewards Shareholders: Issuing bonus shares provides extra shares to existing shareholders without diluting their percentage of ownership.
• Utilises Reserves: Companies use idle reserves for expansion rather than paying taxes on accumulated profits.
• Improves Financial Ratios: By increasing the number of shares and reducing face value, key financial ratios like earnings per share (EPS) and return on assets (ROA) are enhanced, signaling positive growth.

Eligibility Criteria for Issuing Bonus Shares

According to India’s Companies Act 2013, certain conditions must be met to issue bonus shares. The bonus shares meaning extends to understanding these requirements:

• The company must be a listed public company with distributable and liquid reserves.
• The bonus issue must be approved by shareholders in an Annual General Meeting (AGM), and a record date must be set.
• Fully paid-up bonus shares are issued from free reserves or share premium accounts.
• The bonus share ratio is generally capped at 1:1, though multiple issues can occur over time.

What is the Record Date of Bonus Shares?

Bonus shares’ record date, also known as the cut-off date, determines which shareholders are eligible for the bonus issue. This is an essential par, as only those holding shares on this date will receive bonus shares.

This date is set following shareholder approval and is crucial for determining eligibility. Bonus shares are credited to the shareholders’ demat accounts relative to their holdings on the record date.

Critical Benefits of Bonus Shares

Bonus shares offer several benefits:

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• Tax-Free: As bonus shares are issued from the company’s reserves, they are tax-exempt under Section 55 of the Income Tax Act, 1961.
• Increases Affordability: The reduced face value makes shares more accessible to retail investors, boosting liquidity.
• No Dilution: Although the number of shares increases, shareholders’ percentage stake remains unchanged, and the total market value of holdings remains the same.
• Boosts Key Ratios: Financial ratios such as EPS and ROE improve with a lower share capital, indicating positive growth prospects.

Difference Between Stock Split and Bonus Shares

Understanding the bonus shares meaning also involves distinguishing them from stock splits. Both increase the number of shares outstanding but serve different purposes. A stock split involves dividing existing shares into multiple new shares, lowering the trading price and enhancing liquidity. For instance, a 2-for-1 stock split doubles the number of shares but halves the share price.

Conversely, bonus shares are issued to existing shareholders at no additional cost, based on the shares they already hold. This method redistributes reserves without altering the company’s market capitalisation.

Difference Between Right Shares and Bonus Shares

While both right shares and bonus shares increase a shareholder’s number of shares, they differ in origin and purpose, which is central to the bonus shares meaning.

Right shares are offered at a discount to existing shareholders to raise new capital, requiring payment for the new shares. Bonus shares, however, are issued free of charge from the company’s reserves without requiring additional payment from shareholders.

Conclusion

Bonus shares are an effective tool for companies to reward their shareholders, enhance liquidity, and signal growth. Understanding the eligibility criteria, record date, and the difference between bonus shares and stock splits can help you make informed investment decisions.

Overall, companies that frequently issue bonus shares and demonstrate strong fundamentals often provide significant long-term benefits to their investors.

FAQs

1. What is the tax impact of receiving bonus shares?

Receipt of bonus shares is tax-exempt as per section 55 of the Income Tax Act, 1961. No tax is levied at the time of bonus issue credit. Any subsequent capital gains on selling bonus shares attract tax as per the holding period.

2. Can investors sell bonus shares immediately after receipt?

Yes, investors can sell the bonus shares immediately after credit or hold them for long-term gains. Bonus shares have no lock-in, unlike IPOs and FPOs. Trading them immediately is allowed.

3. How does the company decide on bonus ratios like 1:1 or 1:2?

The bonus ratio is decided based on available reserves, share capital, and stock liquidity needs. The most common ratio of 1 bonus share for one held provides balance. Higher ratios are rare since substantial reserves get capitalized.

4. Is there a limit on the number of bonus issues in a year?

No, there is no limit imposed by SEBI or Companies Act on the frequency. However, issuing bonuses annually may signal inadequate reserves being capitalized too fast. Investors should assess the context.

5. How do shareholders get updates on bonus issues and record date?

All bonus issue approvals are reflected in stock exchange filings immediately. Investors get SMS/email alerts on record dates directly from the depository or via DP. Following company announcements is advised.

6. Which company give bonus shares?

Many companies, particularly those with robust financial health and significant reserves, issue bonus shares.

Author: All Content is verified by SMC Global Securities.