Bonus Shares are extra shares offered to the company’s stockholders. Instead of dividends, the firm can choose to distribute its accumulated earnings in the form of Bonus Shares. These shares are fully paid shares issued by a firm to its current owners at no cost. The amount of shares a shareholder already holds is frequently used to determine the bonus issue.
Bonus shares are issued by a corporation in order to boost the stock’s liquidity and investor engagement. After a bonus issuance, the stock price lowers to a fair range, allowing investors to buy more shares. The delivery of shares into a Demat account in India takes two days after the trading date. Existing shareholders are eligible to receive bonus shares issued by a corporation before the ex-date and record date. To be eligible for bonus shares, however, the company’s stock must be purchased before the ex-date. Bonus shares are credited to owners’ accounts within fifteen days once a new ISIN (International Securities Identification Number) is assigned to the bonus shares. Advantages Bonus Shares
Rewarding investors for their trust and devotion to the company, which also serves to improve investor sentiment. Disadvantages When the price of a share is high, retail investors find it difficult to buy shares in a company. When the number of shares issued increases, the price decreases, making the stock more accessible to regular investors. The number of outstanding shares is increased by issuing Bonus Shares. As a result, traders are more likely to participate, increasing the liquidity of the stock. Bonus shares increase the number of shares in circulation, changing the Earnings Per Share (EPS). After the bonus shares are issued, the share’s EPS decreases because the net profit remains the same and the number of shares is larger. Finally, increasing the dividend payout per share would add value to the investment. Bonus shares are available to shareholders who own the firm’s stock prior to the record date and the ex-date determined by the company. For the delivery of shares in India, the T+2 rolling system is used, in which the ex-date is two days before the record date. Bonus share eligibility is determined by the shareholders’ record date and ex-date.
The record date is a cut-off date defined by the company, and to be eligible for the bonus share issue, investors must be shareholders of the company before this date. Furthermore, the ex-date is one day before the company’s record date. Existing shareholders receive additional shares in a particular percentage in a bonus issue. If a 4:1 bonus issue is announced, for example, owners will receive four shares for every one they own. So, if an investor owns 10 shares of a corporation, he or she will receive a total of 40 (4*10) shares.