Reliance Industries Chairman Mukesh Ambani recently announced a 1:1 bonus share issue for the company’s shareholders, i.e. one bonus share for each of its shareholders. Let’s see what bonus shares are:
What is a bonus share?
A stock bonus refers to additional shares that a company issues to shareholders at no additional cost. These 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 to receive bonus shares?
Bonuses are awarded to those who own shares in the company before the ex-date and the record date. The record date is usually two days after the ex-date. To be eligible for bonus shares, investors must own shares before the ex-date. If someone buys shares on the ex-date, they will not be eligible to receive bonus shares.
Types of bonus shares
There are two main types of bonus actions:
Fully Paid Bonus Shares: These are shares for which the shareholder has already paid the full amount due at the time of issue. 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 owed. In this case, the company issues free shares to its shareholders, but they must make additional payments to own all of those shares.
Benefits of Stock Bonus for Investors:
Larger holdings: Investors receive more shares without additional investment, potentially improving future returns if the stock price appreciates.
Portfolio growth: Bonus shares increase the amount of shares held, which can be beneficial over time.
Tanvi Kanchan, UAE Business and Strategy Director at Anand Rathi Shares and Stock Brokers, explained the benefits for the company:
Market perception: Issuing bonus shares is a sign of financial health, improves the company’s market image and attracts new investors.
Shareholder loyalty: Rewarding shareholders with bonus shares helps build investor trust and loyalty.
Disadvantages of bonus shares
Choosing to issue bonus shares instead of dividends can put a long-term financial strain on the company.
Shareholders seeking returns through dividends may be hesitant to make further investments.
“It does not benefit the common shareholder, apart from being positive for sentiment. Earlier, one could offset capital gains by selling the pre-bonus shares once they became ex-bonus. And interestingly, one can even offset capital gains on debt mutual funds through this route. But this tax loophole on bonus shares has also been removed,” said Kunal Mehta, associate director, Equirus.
First published: September 3, 2024 | 17:55 IS
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