‘Bonus’ is a word that quickly catches the attention of most of us because it is given as a reward. This term has a relation with the stock market too. A bonus issue is a popular corporate action that directly affects stock prices. Plus, investors’ reactions to such corporate actions can also be seen in stock price movements. Therefore, it is important to understand the concept of bonus shares before jumping onto stocks of companies coming up with it.
This article covers a short note on the concept of bonus shares, types, eligibility and tax implications of stock bonuses.
What Are Bonus Shares?
Bonus shares or Stock bonuses mean the additional shares a company gives to its current shareholders, in proportion to the number of shares they own, as a bonus. Investors are not required to pay any additional cost for it; instead, the share price after the bonus issue would adjust according to the proportion of the bonus issue. Therefore, the overall investment of shareholders would remain the same.
Let’s understand bonus shares calculation with an example. Suppose you have 200 shares of XYZ Limited company, which is traded at โน300 per share, and it announced a two-for-one bonus share. Here is how to calculate bonus shares post-bonus issue.
2:1 bonus
| No. of shares held | Share price | Investment value | |
| Pre bonus issue | 200 | โน300 | โน60,000 |
| Post bonus issue | 600 (400 bonus shares + 200 original shares) | โน100 | โน60,000 |
Understanding Bonus Shares
Bonus issues of shares help the company to increase its equity base. The benefits of issuing bonus shares for companies are as follows.
- If the company has marked good profits yet cannot pay cash dividends, bonus shares may be an option that the company may consider.
- The company may gain popularity and see increased retail participation due to the bonus issues of shares.
Some of the advantages of bonus shares for shareholders are as below.
- Existing investors would receive more shares without additional costs and tax.
- Potential shareholders may benefit from reduced stock prices after the bonus issue.
- Shareholders may benefit from increased liquidity of the stocks, and they may be able to sell some shares while still having a stake in the company.
Some companies which announced bonus issues of shares so far in 2022 include Pondy Oxides, Ram Ratna Wires, Ruby Mills, GAIL, Torrent Pharma, Nazara, etc.
Types Of Bonus Shares
1. Fully paid-up
The bonus shares given free of cost to shareholders, in the ratio of shares they own, are called fully paid-up bonus shares.
A company may issue fully paid-up bonus shares from its profit and loss account, security premium account, capital redemption reserves, etc.
2.Partly paid-up
Suppose a company issues shares at โน100, where you need to pay โน70 at that time. The company may make a call for the remaining โน30 in the future when required. These shares are called partly paid-up shares.
At a later date, If the call for the remaining โน30 is not made by the company and instead funds it from the reserves, then such partly-paid up shares are called partly-paid up bonus shares. In this case, the shareholder will get the share without paying โน30. ย ย
A company may issue partly paid-up bonus shares from general reserve, investment allowance reserve, etc.
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Who Is Eligible For Bonus Shares?
Understanding record date and ex-date may help you better understand eligibility.
Record date – A date announced by the company on which investors must have shares to participate in some corporate actions, the stock bonus here.
Ex-date – Ex-date is set as two business days before the record date, any stock purchase after which would not allow shareholders to participate in stock bonus.
Hence, all the shareholders who possess shares of the issuing company before the ex-date and on the record date are eligible to receive stock bonuses.
For instance, suppose the record date is Thursday, and the ex-date is Tuesday. The shareholders who purchased stock on that Thursday would not be allowed to participate in the bonus issue because it takes two business days for stocks to be delivered to the shareholder’s Demat account. Only those who bought shares before Tuesday would be allowed to participate.
Stock Bonus Taxation
There would be no tax on the bonus shares allotment. However, selling such bonus shares may incur capital gain tax.
If you held the bonus shares for more than one year, the gain from selling such shares would be treated as a long-term capital gain. On the other hand, if you held the bonus shares for less than one year, the gain from selling them would be treated as a short-term capital gain. The tax would be levied accordingly.
Final Thoughts
All kinds of bonuses usually look appealing at first, and stock bonuses may not be an exception. After all, it comes without additional cost. However, one should also remember that it does not offer any extra wealth.
Companies may consider bonus shares an alternative to dividends and retain cash to reinvest it in the business. The primary benefit investors get from the bonus issue is boosted liquidity of the stock.
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FAQs
If you are eligible, bonus shares will automatically get credited to your Demat and trading account.
Some reasons for stock bonuses may be funds shortage for paying dividends to shareholders, the need to restructure company reserves, encourage retail participation, etc.
If you possess the issuing company’s shares on the record date, your bonus shares will get credited to your Demat account, usually within 15 working days from the record date.
