What are Bonus Shares- Eligibility criteria & Benefit
Bonus shares are additional shares granted to current shareholders by a firm as a “BONUS” when the company is unable to pay a dividend to its shareholders while making a profit for the quarter.
Only a company that has made a massive profit or has large free reserves that cannot be used for any specific purpose and can be dispersed as dividends has the ability to issue bonus shares to its owners.
These bonus shares, on the other hand, are distributed to shareholders in proportion to their current holding in the company. Also Read: What Are Entry Load And Exit Load? And How To Calculate Them
Consider the following scenario:
If a corporation declares one-for-two bonus shares, an existing shareholder will get two more shares in exchange for one existing share.
Assume a shareholder owns 2,000 shares in the business. He will receive 1000 bonus shares when the firm releases one for two bonus shares, i.e. (2000 * 1/2 = 1,000).
The terms “record date” and “ex-date” are used when the corporation issues bonus shares to its shareholders. Let’s understand the terms “record date” and “ex-date” below:
What is the Record Date?
The record date is the cut-off date fixed by the company for bonus shares eligibility. The company will issue bonus shares to all shareholders who have shares in their Demat account on the record date.
What exactly is Ex-Date?
The ex-date is one day earlier than the record date. An investor must purchase the shares at least one day before the market opens.
Who is Eligible for Bonus Shares?
Bonus shares are available to shareholders who purchased the company’s stock before the ex-date and record date.
In India, the T+2 rolling system is used for share delivery, with the record date being two days after the ex-date.
Shareholders must purchase shares before the ex-date since the company will not grant ownership of shares if they do so after the ex-date, and they will not be eligible for bonus shares.
The bonus shares will be assigned a new ISIN (International Securities Identification Number). Within 15 days, the bonus shares will be credited to the shareholder’s account.
Benefits of Bonus Shares
From the Investor’s Perspective
1) When investors receive bonus shares from the company, they are not required to pay any taxes.
2) Bonus shares are advantageous to long-term shareholders who want to increase the value of their investment.
3) Bonus shares are issued by the company at zero cost to shareholders, increasing the number of outstanding shares of an investment in the company and increasing the stock’s liquidity.
4) Bonus shares give rise to an investor’s trust in the company’s business and operations by allowing the investor to participate in the company and receive funds in return.
From the company’s Perspective
1) The distribution of bonus shares boosts the company’s worth and improves its market position and image, also earns the trust of existing shareholders, and attracts a number of small investors to the stock market.
2) With the issuance of bonus shares in the market, the companies have more free-floating shares.
3) The bonus shares help companies to get out of situations where they are unable or unwilling to pay cash dividends to their shareholders.
Disadvantages of Bonus Share
From the Investor’s Perspective
1) There are no significant disadvantages to having bonus shares from the perspective of an investor. They should be aware, however, that they will receive bonus shares because the profit will remain the same, but the number of shares will be increased while the earnings per share will decrease.
From the company’s perspective
1) When bonus shares are issued, the company does not get any cash. As a result, the potential to acquire funds through a follow-on offering is reduced.
2) When a company continues to issue bonus shares rather than paying dividends, the cost of the bonus granted increases over time.
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