My recent columns have focused on benefitting through corporate investments like shares, debentures, corporate bonds etc. continuing with this series today I will elaborate about the concept of bonus shares and the features characterizing it.
“The best things in life are free. The rest are too expensive.” This is what summarises the importance of Bonus shares. They are free. They are more. And with the intrinsic feature of compounding, a meagre holding of 10 shares or 100 shares can over time transform into massive holdings of lakhs and crores of shares. I am just talking about the absolute number of shares, which in terms of value, can grow multi-fold and generate exponential returns and slowly snowball into a massive fortune.
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So, what are Bonus Shares?
Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated profits which are not given out in the form of dividends, but are converted into free shares. The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding. For instance, if Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will increase to 1000 shares.
Bonus shares enjoy all the rights and privileges of the existing equity shares. The only difference between the existing equity shares and bonus shares is that equity shares are issued against the receipt of consideration (value) in cash and bonus shares are issued free of cost and hence the term bonus. Issue of bonus shares does not alter the shareholding pattern since the bonus shares are issued on a pro-rata basis. You will often hear about record date and ex-date whenever a company announces issuing of bonus shares. So let us understand what record date and ex-date are:
What is Record Date?
The Record Date is the predetermined cut-off date set by the company when the investor must hold or own shares in his Demat account in order to be eligible for the bonus shares. The record date is set so they can identify the eligible shareholders and distribute bonus shares. All the investors owning shares in their Demat account on the record date are eligible for the bonus shares announced by the company. The bonus shares are generally credited to the Demat account within a period of 15 days from the record date.
What is Ex-date?
In India, delivery of the shares in the Demat account happens after Transaction+2 days. So, in case you don’t hold any shares of the distributing company, you must buy the shares two days before the record date, in order to turn eligible for the acquisition of bonus shares. The Ex-date is one day before the record date. Hence, you become eligible for the distribution of bonus shares, if you buy the shares before the Ex-date, in case you have not invested any prior amount. Ex-date marks the cut-off date before which investor must purchase the shares in order to be eligible for the distribution of bonus shares in proportion to the number of shares purchased by the investor before the said date. However, if you buy the stock for the first time on the ex-date, the shares will be credited to your Demat account after the record date, following T+2 settlement date, making you ineligible for any bonus shares. In such a case, the person who has sold the shares will be eligible for the bonus shares.Conversely, if you want to liquidate your positions in the related security and still be eligible for the bonus shares, you need to hang on to the shares until the ex-date.
As rewarding as a bonus share is, I will continue with this topic in my following column talking about the reasons behind its issue for a company, taxation from the shareholders point of view and other overall aspects needed to understand this topic.
