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Reliance Industries chairman Mukesh Ambani recently announced a 1:1 bonus issue for the company’s shareholders, meaning one bonus share each for one held by its shareholders. Let us understand what is bonus share:
What is a bonus share
A stock bonus refers to additional shares that a company issues to shareholders at no extra cost. Such shares are typically issued as a way for the company to reward investors and demonstrate financial strength by converting reserves or profits into additional shares.
Who is eligible for bonus shares
Bonus is granted to those who own the company’s shares before the ex-date and record date. The record date is typically two days after the ex-date. To be eligible for bonus shares, investors must hold shares prior to the ex-date. If someone purchases shares on the ex-date, they will not be entitled to receive bonus shares.
Types of bonus shares
There are two main types of bonus shares:
Fully paid bonus shares: These are shares for which the shareholder has already paid the entire amount due at the time of issuance. When a company distributes fully paid bonus shares, it does not require any further payment from its shareholders.
Partially paid bonus shares: These are shares for which the shareholder has paid only a portion of the total amount due. In this case, the company issues bonus shares to its shareholders, but they are still required to make further payments to fully own these shares.
Benefits of share bonus to investors:
Increased holdings: Investors receive more shares without additional investment, potentially enhancing future gains if the stock price appreciates.
Portfolio growth: Bonus shares increase the number of shares held, which can be beneficial over time.
Tanvi Kanchan, head – UAE Business & Strategy, Anand Rathi Shares and Stock Brokers, explained benefits to the company:
Market perception: Issuing bonus shares signals financial health, improves the company’s market image and attracts new investors.
Shareholder loyalty: Rewarding shareholders with bonus shares helps to strengthen investor confidence and loyalty.
Disadvantages of bonus shares
Choosing to issue bonus shares instead of dividends can place a long-term financial strain on the company.
Shareholders seeking returns through dividends may hesitate to make further investments.
“It does not benefit the common shareholder apart from being sentiment positive. Earlier one could set off capital gains by selling the pre bonus shares once they become ex bonus. And interestingly you can even set off your debt MF capital gains through this route. But this Bonus share tax loophole has also been removed,” said Kunal Mehta, associate director at Equirus.
First Published: Sep 03 2024 | 5:55 PM IST
