What is a Bonus Issue? Meaning, Process, Key Dates, and Impact Explained

Companies have multiple ways to reward their shareholders and manage their capital structure. One such method is through a bonus issue, a term that often leaves investors interested.

This blog delves deeper into what a bonus issue is, its purpose, and its implications for shareholders.

Meaning Of Bonus Issue

A bonus issue is a corporate action where a company issues additional shares to its existing shareholders free of cost, based on the number of shares they already hold. Essentially, it is a way for a company to distribute accumulated profits or reserves without paying out cash.

How Does a Bonus Issue Work?

When a company decides to issue bonus shares, it converts part of its reserves into equity capital. For instance, if a company declares a bonus issue of 1:2, it means that for every two shares a shareholder owns, they will receive one additional share for free. This does not change the overall value of the investment but increases the number of shares held by the investor.

Purpose of Bonus Issues

• Rewarding Shareholders: One of the primary reasons for issuing bonus shares is to reward shareholders without parting with cash. By providing them with additional shares, companies aim to acknowledge the loyalty and trust of their investors. 
• Improving Stock Liquidity: A bonus issue can improve the liquidity of a company’s shares. By increasing the number of shares in circulation, trading activity is expected to rise, which can increase the liquidity of the stock.
• Making Shares Affordable: If the share price of a share is high, issuing bonus shares can reduce the price per share, making it more affordable for small-scale investors. This action thus attracts a wider base of shareholders.
• Signaling Strong Financial Health: A bonus issue often signals that a company is confident about its future prospects and has reserves. This can boost investor confidence and enhance the company’s reputation in the market.

Process of Issuing Bonus Shares

The process of issuing bonus shares involves several steps and requires compliance with regulatory guidelines set by the Securities and Exchange Board of India (SEBI).

• Board Approval: The process begins with the company’s board of directors passing a resolution to issue bonus shares. This resolution determines the ratio of the bonus issue and the record date, which is the date on which shareholders eligible to receive the bonus shares are determined.
• Shareholder Approval: Following board approval, the proposal must be approved by the shareholders in a general meeting. This step ensures that the interests of all shareholders are considered and that they have a say in the decision.
• Regulatory Filings: Then, the company files the necessary documents with SEBI and the stock exchanges. The documents include providing details of the bonus issue and ensuring compliance with all regulatory requirements.
• Distribution of Bonus Shares: Once all approvals are received, the company distributes the bonus shares to eligible shareholders. The shares are credited to the shareholders’ demat accounts, and they are informed about the credit through their respective depository participants.

Implications for Shareholders

1. No Financial Gain: One important aspect of a bonus issue is that it does not provide any direct financial gain to shareholders. Even though they receive additional shares, the overall value of their holdings remains the same because the market adjusts the share price downward to reflect the increased number of shares.
2. Tax Implications: In India, bonus shares are not taxable at the time of issue. However, when the shareholder sells these shares, capital gains tax is applicable like any other security sale. 
3. No Change in Shareholding: Though a bonus issue results in an increased number of shares, the shareholding pattern remains consistent because every shareholder receives the bonus share.

Key Dates

Announcement Date – It is the date on which the Board announces the Bonus issue. It is also known as the Declaration Date.

Record Date – It is the date on which a company that is going to give bonus shares decides the eligible shareholders to receive the bonus shares.

Ex-Date – This is the date by which you need to purchase the shares to be eligible to receive the bonus shares. Generally, it is two days prior to the record date as settlement takes two days in most of the markets. 

Impact on the Stock Market

1. Share Price Adjustment: Following a bonus issue, the share price adjusts to reflect the increased number of shares in circulation. For example, if a company issues bonus shares in a 1:1 ratio, the share price is likely to halve because the number of shares has doubled.
2. Market Perception: A bonus issue is often perceived positively by the market as it indicates the company’s robust financial health. It can lead to increased investor interest and potentially drive up the share price in the long run, despite the initial adjustment.
3. Liquidity and Trading Volume: The increased number of shares can lead to higher trading volumes, enhancing liquidity. This can make the stock more attractive to both retail and institutional investors, contributing to a more dynamic market environment.

Indian Case Studies of Bonus Issues

Reliance Industries Limited (RIL):

Reliance Industries Limited is one of the most renowned companies in India. In 2017, RIL announced a bonus issue in the ratio of 1:1. This move was well-received by the market players, leading to a surge in trading volumes and positive investor sentiment. 

Tata Consultancy Services (TCS):

TCS is one of the biggest tech companies in India. In 2018, Tata Consultancy Services (TCS) declared a bonus issue at a 1:1 ratio. This was the result of one of the company’s efforts to reward its shareholders and increase the affordability of its shares. The bonus issue was perceived positively and contributed to a boost in the company’s market capitalization.

How can I track Bonus Issues?

Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

You can access the corporate actions page to get the detailed list.

But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

Sign up now and never miss any corporate announcement.

Conclusion

Bonus issues are a significant corporate action that reflects a company’s confidence in its financial health and future prospects. However, for shareholders, there is no immediate financial gain. But the long-term benefits of this action can be substantial if the company continues to perform well. 

Bonus issues also enhance stock liquidity and make shares more affordable. However, it is crucial for investors to understand the implications of bonus issues and consider them while making an investment decision. 

Frequently Asked Questions (FAQs)