What Is A Bonus Share Issue And How Does It Work?

by Nirav Singhaniya Financial Advisor

One of the ways in which a company rewards its shareholders is in the form of bonus shares. Bonus shares are free shares given by a company to its shareholders. Under the Companies Act, one of the uses for Share Premium collected in an IPO is to issue bonus shares. By issuing bonus shares, the number of shares issued increases, but there is no difference to the total value of the shares. To put it simply, a bonus share is like declaring a dividend but in a different form.

Whenever a company issues bonus shares, it is called a bonus issue. The bonus issue is always in ratio to the shares held by the shareholder. So, when the bonus issue is announced in the ratio of 1:2 it means 1 bonus share will be issued for 2 shares held by the shareholder.

A bonus issue for listed shares is like a fresh issue of shares without any additional resources raised. For listed companies, they declare a record date for bonus shares. Bonus shares before the record date are called cum bonus and bonus shares after the record date are called ex-bonus. The record date is very important for people looking to get the benefit of the bonus share issue. The company will consider the list of shareholders on the record date for the purpose of bonus issue. If you purchase shares after the record date, then you will not be considered for the bonus issue. This is why it is necessary to purchase shares on or before record date.

After the bonus share issue, the price of the share in the online share market will reduce in proportion to the bonus issue. For example, if the price of the share before the bonus issue was Rs. 500 and the company came out with a 1:1 bonus issue, then the share price after bonus will be Rs. 250. So, in case you have invested in the company, then don’t be surprised with the drastic fall in the share price.

The company has to take permission of the stock exchange to list the bonus shares. Since there may be a lag between when the bonus shares are issued to when they are credited to your demat account, the share price in the online stock market may not immediately reflect the bonus issue.

One important thing to remember is that a company cannot issue partly paid up bonus shares. They can issue partly paid rights shares but not bonus shares. Bonus shares are not issued with an intention to raise funds which is why there is no fundraising attempt from the company.

You can invest in a bonus share issue by purchasing shares of that company before the bonus issue. However, to invest in online share market, you need a demat account and trading account. You can open these accounts with a reputed stock broker like IndiaNivesh who can help you with purchasing the shares that are going to have a bonus issue coming up in some time.