Bonus Shares – Meaning, Types, Advantages and Disadvantages

Bonus shares are an additional number of shares given by the company to its existing shareholders as “BONUS” when they are not in the position to pay a dividend to its shareholders despite earning decent profits for that quarter.
Only a company has the right to issue bonus shares to their shareholders, which has earned massive profit or large free reserves that cannot be utilized for any particular purpose and can be distributed as dividends.
However, these bonus shares are given to the shareholders according to their existing stake in the company.
For example:
If a company declares one for two bonus shares, it would mean that an existing shareholder would get two additional shares for one existing share.
Suppose a shareholder holds 2,000 shares of the company. When the company issues bonus shares, he will receive 1000 bonus shares, i.e. (2000 *1/2 = 1,000).
When the company issue bonus shares to its shareholders, the term “record date” and “ex-date” are also mentioned. Let’s learn about the term “record date” and “ex-date” given below:

What is the Record Date?

The record date is the cut-off date decided by the company to be eligible for bonus shares. All shareholders who have shares in their Demat account on the record date will be eligible to receive bonus shares from the company.

What is Ex-Date?

The ex-date is one day before the record date. Here an investor has to buy the shares at least one day before the ex-date to become eligible for the bonus shares.

Shareholders who own the company's shares before the ex-date and record date are eligible to receive bonus shares from the company.
In India, the T+2 rolling system is set for the delivery of the shares, wherein the record date is two days behind the ex-date.
Shareholders must purchase shares before the ex-date because if they purchase on the ex-date, the company will not give the ownership of shares, and therefore, they will not be eligible to receive bonus shares.
Once a new ISIN (International Securities Identification Number) is allotted for the bonus shares. The bonus shares will be credited to the shareholder's account within 15 days of time.

From Investor's Point of View
1) Investors do not have to pay any tax while receiving bonus shares from the company.
2) Bonus shares are considered beneficial for long-term shareholders of the company looking to multiply their investment.
3) Bonus shares are free of cost to shareholders as they are issued by the company, which increases the outstanding shares of an investor in the company and enhances the liquidity of the stock.
4) Bonus shares help build the trust of an investor in the company's business and operations because they have invested in the company and, in turn, gives capital to the investor.

From Company's Point of View
1) The issue of bonus shares enhances the company's value and increases positions and image in the market, gaining the trust of existing shareholders and attracting several small investors to be a part of the stock market.
2) The companies have more free-floating shares with the issue of bonus shares in the market.
3) Issue of Bonus shares benefits companies to get themselves out of the situation where they are not able to or simply not prefer to pay cash dividends to their shareholders.

From Investor’s Point of View
1) There is no much of a disadvantage of owning the bonus shares from an investor’s point of view. However, they should know about receiving bonus shares because the profit will remain the same, but the number of shares will be increased as the earning per share will fall.

From Company’s Point of View
1) The company do not receive any cash while issuing bonus shares. As a result, the ability to raise money by following an offering is minimized.
2) When a company keep on issuing bonus shares instead of paying dividends, the cost of the bonus issued keeps adding up over the years.

There are two different types of bonus shares as follows:
1) Fully paid bonus shares
2) Partly-paid up bonus shares

• Fully Paid Bonus Shares

Fully paid bonus shares are those shares that are distributed at no extra cost in the proportion of the investors holding in the company.
These types of bonus shares can be issued from the following sources:
1) Profit and loss account 2) Capital reserves 3) Capital redemption reserves 4) Security premium account

• Partly-Paid Up Bonus Shares

Before understanding party-paid up bonus shares, let’s understand what a partly-paid share is?
A partly paid share is a share in a company that is only partially paid compared to the full issue price. It means that the investor can buy partly paid shares without paying the total issue price.
However, the remaining amount for partly paid shares can be paid in instalments when the company makes calls.
So when the bonus is applied in the partly-paid shares and converted into fully paid shares without calling out the uncalled amount through profit capitalization, it is called partly-paid up bonus shares.
However, unlike fully-paid up bonus shares, partly paid-up bonus shares cannot be issued through a capital redemption reserve account or security account.

• Does the issue of bonus shares enhances the company’s value?

YES. The issue of bonus shares enhances the company's value and increases positions and image in the market, gaining the trust of existing shareholders and attracting several small investors to be a part of the stock market.

• Who is Eligible for Bonus Shares?

Shareholders who own the company's shares before the ex-date and record date are eligible to receive bonus shares from the company.

• What is Ex-Date?

The ex-date is one day before the record date. Here an investor has to buy the shares at least one day before the ex-date to become eligible for the bonus shares.