Someone has correctly said, “Learn to earn more”. The same thing applies to success in the stock market. Before you start investing or trading in the stock market, it is important to learn the basics of the stock market. As a part of basics, today we will learn about bonus shares.
What are Bonus shares?
In layman terms, the word ‘bonus’ simply means receiving something extra without giving anything extra. The concept of bonus shares is also in the same lines.
Bonus shares are the shares allotted/issued by the company to its existing shareholders at free of cost. It means that the company does not receive any economic benefits via the issue of bonus shares. It is an alternative to paying cash dividends to shareholders. Also known as capitalization of profits because it is given out of profits or reserves of the company.
Section 63 of Companies Act, 2013 empowers a company to issue bonus shares to its existing shareholders in the proportion of the number of shares they hold.
Why Bonus shares are issued?
Sometimes, a company performs well & produces good financial results but may not have enough cash. In such a case, the company issues bonus shares to compensate for cash dividends so that the shareholders dependent on cash dividends do not get affected & can sell those bonus shares in the open market.
Who is entitled to Bonus shares?
Bonus shares are given to the existing shareholders of the company. But given the fact that shares exchange the hands daily, how does a company identify the entitled shareholders? The company declares a record date along with the declaration of issue of Bonus shares
What is the record date?
The record date is the cutoff date set by the company & whosoever is the shareholder of the company on that date will be entitled to the bonus shares. After that date, the company will not consider the share transfers to determine the existing shareholder for the bonus share entitlement. E.g., if on the record date 15th April, Raman is the shareholder, then he will be entitled to the bonus shares. It does not affect his entitlement even if he transfers his shareholding to another person on 16th April.
How Bonus shares are calculated?
Companies declare a ratio for bonus shares allotment/issue, like for every 2 shares, 1 bonus share will be given. So in this case, if a shareholder has 1000 shares, he will be given 500 bonus shares. After getting bonus shares, he will have 1500 shares of that company.
Taxation of Bonus Shares
Bonus shares are not taxed in the hands of the shareholder at the time of receipt. However, when shareholders sell these shares, their sale proceeds are taxed just like any other share sale proceeds & their cost of acquisition is considered to be nil. In short, entire sale proceeds are taxed.
Impact of Bonus Issue
The bonus issue does not have any impact on the market cap. of the company. Theoretically, after the bonus shares are issued, the price per share should go down as the number of shares has increased to have the same market value that was before the issue. However, it will increase the liquidity of the shares in the secondary market thus making it less volatile.