Bonus shares- A sparkle on the Shareholder’s eyes

Click here to Enjoy Live SHARE MARKET Commentary and for NSE & MCX

Bonus shares are shares issued by a company.It is also called “scrip issue”. It is given free of charge to its existing shareholders. It is issued on a Pro-rata basis. Profits can be distributed without distributing the liquid portion of the company. It is distributed in addition to the already existing shares as fully paid-up shares. It is an alternative to increase the Dividend payout.
Investment is to distribute money with the expectation of some advantage in future that is known as “returns”. There are 3 types of investors- risk-averse, risk seekers and risk neutral. The investors who invest in share, bonds etc.

When bonus shares are given, the size of the company does not change and in effect, the asset side of the Balance sheet remains unaffected. On the liability side, the reserves are reduced by the amount of increase in the equity share capital. Reserves are capitalized in this way. They no longer become available for distribution as dividends. Every company fixes a date for Bonus issue which is known as the Record Date. The existing stakeholders who had purchased shares before the declaration of the bonus issue are only eligible for the bonus shares. The investors who investor after the record date is not eligible for the Bonus issue. The price-adjustments of the shares are made on the ex-date.

• Advantages of Bonus issue to the Shareholders

• The bonus shares are issued on a pro-rata basis. The number of shares that the stakeholder is holding increases but the total value of the stock will remain the same. For example, if the shares are issued on 2:1 basis then for every 2 shares a person will get only 1 share. But the price of the entire shareholding remains unaltered.

• The ownership of the company remains unaltered. The bonus issue does not affect the ownership in any way.

• The stakeholders will receive an increased amount of dividend from the company. In case of cash dividends received from the company, the shareholder holding more number of shares will get more cash dividend.

• Since the company will be paying the Corporate dividend taxes on the shares so the investors do not have to pay taxes on it.

• It is favorable to the investors who want to invest in the company for long term. The bonus shares will grow their investments.

• Disadvantages of Bonus Issue to the Shareholders

• Some investors might not want to get bonus share issue instead of a cash bonus. If they sell these bonus shares, they might not get the expected rate and the number of stocks will also decrease.

• The bonus issue drops the price of the shares in order to keep the market price per share the same as a result the share price of the stakeholders does not increase.

 

• Advantages of Bonus issue to the company

Bonus shares are issued to the investors to buy their confidence and to make them happy. These are company policies to have a hold on the investors. On the other hand, the investors are very happy to receive the bonus shares as it actually adds value to their investment.

The company issues bonus to increase the total number of paid-up equity shares in the market in order to increase the trading of its shares in the Capital market. However, after the issue of bonus shares, the stock price per share in the market decreases. It becomes easier for the investors to invest in more shares and the trading of the shares in the Capital market increases to a great extent. Thus making it profitable for the company and the shareholders.

• Disadvantages of the Bonus issue to the company

Bonus issue creates a negative impact on the market. It decreases the future Earning per share and the dividend yield ratio of the company. In other words, the bonus issue reduces the share price in the market.
However, it should be noted that the declaration of Bonus issue in lieu of dividend is not made.The bonus issue is not made unless the partly paid shares if any, existing are made fully paid-up.The bonus issue eventually adds value to the investment in many ways.

For more articles click here