What are bonus shares, and what are the different benefits of it?

What are Bonus Shares And What Are The Different Benefits Of It?

A firm offers bonus shares to its present shareholders. When a corporation cannot pay dividends to its investors, it may distribute those payments to its investors as a “bonus.” The firm may face an inability even if it had a good quarter. The firm also retains a portion of its profits.

A firm may only issue bonus shares to its owners, according to the Companies Act of 2013. These are businesses that have made a lot of money or have a lot of cash. Those with a Demat account may readily trade their stocks on the secondary market to fulfil their liquidity requirements.

Capitalisation occurs when a corporation utilises its earnings or cash reserves to enhance its share capital. The corporation then distributes bonus stock. Some shareholders may be perplexed as to why a corporation would distribute such shares. Potential investors will see the firm as more successful if it earns more money per employee.

Distributing Bonus Shares

Investors are awarded a bonus in the form of additional shares determined by the number of shares they own. Let’s say a firm announces that it will provide a one-share bonus for every share that is already in circulation. This means that a shareholder who already owns one share of Company X’s stock will be given another share of Company X’s stock in return for the share that they already own. This will happen until the ratio is precisely 1:1 throughout the whole process.

Process and Eligibility for Bonus Shares

The following are the eligibility criteria for getting bonus shares as an investor:

• Those who possess corporation shares as of the ex-date- one day before the record date- and the record date will be eligible to receive bonus stock.
• The shares will be sent on a rolling basis on a T+2 basis, which means that the record date will be two days after the ex-date.
• Since the company won’t change the ownership of shares on the ex-date, shareholders must buy shares before the ex-date to get bonus shares.
• After the bonus stock has been given an ISIN(International Securities Identification Number), the bonus shares will be added to the shareholder’s account within 15 days.

In this manner, bonus shares are identical to regular shares in all other respects. They are added to the Demat accounts of the existing investors in the company. As we’ve seen, this process usually takes between ten and fifteen days.

Benefits of Bonus Shares

Bonus shares have many benefits. Here are some of them.

• Investors may earn extra money while still participating in market growth. The purpose of distributing these shares is to compensate stockholders.
• Furthermore, the market price of these bonus shares is frequently less than the price per share, making them lucrative and accessible to investors.
• Furthermore, when investors finally get their bonus share, they are exempt from paying taxes, which is a significant benefit.
• If you have been a shareholder for a long time and want to expand your investment, you could apply for bonus shares.
• The corporation provides bonus shares at no additional expense to owners. As the name implies, they increase an investor’s stake in the company and, thus, the value of their holdings.

Disadvantages of Bonus Shares for Investors

Bonus shares do not result in any extra cash or profits for the firm. So, the distribution of these shares can be both beneficial and bad. Let’s take a look at how this impacts those that are financially stable.

• Even though there are now more shares in circulation, profits per share have remained the same throughout time. This is because the total amount of money produced is unaffected by the distribution of bonus shares. This also means that stockholders’ earnings will be reduced individually.

Types of Bonus Shares

Bonus shares are divided into two types which are described below:

1) Fully paid bonus shares

2) Partly-paid-up bonus shares 

Fully paid Bonus Shares

Fully paid bonus shares can be described as those given to investors who already have a few shares. It doesn’t cost the investors anything extra to avail of these shares. Here are some situations in which these bonus shares could be given out:

1) A statement of profit or loss

2) Stockpiles of liquid assets

3) Reserves for redeeming capital

4) Insurance premium savings

Partly-Paid Up Bonus Shares

A share that has only had a portion of its issue price paid for is said to be ‘partially paid.’ This means that investors can buy shares at a discount. They need only pay a part of the full issue price. When the time comes, the rest of the payment can be made in instalments for partially paid shares. This is something multiple investors use.

Partially paid-up bonus shares are those that have received a bonus. Because of profit capitalisation, the uncalled sum is not “called out,” and the shares are completely paid. If a bonus is only partially paid for, the funds for the bonus cannot come from the security account or the capital redemption reserve account.

Conclusion

Bonus shares are a great investment option. But you have to look for investments that give bonus shares. Piramal Finance is one of the leading financial advisors that provide you with the best financial solutions on the market. They will help you invest so that you will receive bonus shares. They will also teach you about bonus shares and how to invest well. This way, you will reap the rewards of smart investments and make great choices too.