Definition of Bonus Share in Stock Market

If you’re someone who has just started learning about the stock market, you might have come across the term “Bonus Shares” in recent news. Let’s break it down for you in simple terms.

What Are Bonus Shares?

Bonus Shares are free shares that a company gives to its existing shareholders. These are not purchased or paid for. Instead, they are issued out of the company’s profits or reserves. The purpose? To reward shareholders without distributing actual cash.

Recently, a well-known pharmaceutical company, announced a 1:1 bonus issue – meaning one free share for every one held. This comes after four years, indicating the company’s strong financial standing. Read full news here

They have also fixed the record date for the bonus issue, which means investors holding shares before this date will get the bonus shares.

In short, if you own shares in a company and that company decides to give bonus shares, you’ll receive additional shares – for free – in a fixed ratio.

How Bonus Shares Work

Let’s say you own 100 shares of a company and it announces a 1:1 bonus issue. This means you’ll get 1 bonus share for every 1 share you own. So, you’ll end up owning 200 shares after the bonus issue. Your investment value doesn’t double instantly, but your shareholding does.

Companies often issue bonus shares to make the stock more affordable and attractive to small investors, especially if the price per share is getting high.

Bonus Shares in Company Law

Under the Companies Act, 2013, specifically Section 63, the issuance of bonus shares by a company in India is governed by a set of clear legal conditions. Bonus shares refer to fully paid-up shares given to existing shareholders without any additional cost, typically drawn from the company’s accumulated earnings or reserves. However, companies must follow specific guidelines to ensure the issue of such shares is lawful and transparent.

First and foremost, the Articles of Association (AOA) of the company must authorize the issuance of bonus shares. If the AOA does not contain such a provision, the company must first amend it through a special resolution. 

Secondly, the decision to issue bonus shares must be recommended by the company’s Board of Directors and then approved by the shareholders in a general meeting. This dual approval process maintains transparency and protects shareholder interests.

Additionally, bonus shares can only be issued out of certain financial resources, such as the company’s free reserves, the securities premium account, or the capital redemption reserve. This ensures that the company is not jeopardizing its financial stability while rewarding its shareholders.

 It’s also important to note that only fully paid-up shares can be issued as bonus shares; companies are not allowed to issue bonus shares against partly paid-up shares.

These regulatory safeguards outlined in the Companies Act are put in place to prevent misuse of company funds and to ensure that all shareholders are treated fairly during the bonus issue process.

Bonus Shares Issue Procedure 

The procedure for issuing bonus shares by a company involves several important steps to ensure transparency and compliance with regulatory norms. 

First, the process begins with a Board Meeting, where the Board of Directors evaluates the company’s financial position and formally passes a resolution approving the issue of bonus shares. This decision is based on the company’s accumulated reserves and profits, which are capitalized to issue these shares without any additional cost to the shareholders. 

Once the Board gives its approval, the next step involves seeking Shareholder Approval, which is typically done by passing a resolution in the Annual General Meeting (AGM) or, in special cases, through an Extraordinary General Meeting (EGM). 

After shareholder consent is obtained, the company announces a Record Date. This date is crucial because only those shareholders who own shares on or before this date are entitled to receive the bonus shares. Following this, the company provides an official Intimation to the Stock Exchange, notifying both the exchanges and the public about the bonus issue, ensuring transparency and preventing any insider trading or market speculation. 

Finally, after all approvals and announcements, the Bonus Shares are Credited directly into the demat accounts of eligible shareholders, completing the process. This entire procedure is governed by regulations laid down by the Securities and Exchange Board of India (SEBI) and ensures fair treatment of all stakeholders.

Why Bonus Shares Are Issued

You might wonder why companies issue free shares instead of giving cash dividends. Here’s why:

• To reward loyal shareholders
• To increase liquidity of shares by reducing the price per share
• To signal strong financial health
• To conserve cash while still providing value to shareholders
  

It’s a smart way for companies to build trust and confidence among investors.

How Does Bonus Shares Benefit Shareholders?

Bonus shares are additional shares given to existing shareholders by a company, free of cost, usually in proportion to the number of shares they already own. While receiving bonus shares does not increase your immediate wealth—because the share price generally adjusts to reflect the increased number of shares—they offer several long-term advantages. 

Firstly, shareholders end up owning more shares, which can lead to higher returns in the future if the company performs well and its stock price appreciates. 

Secondly, by increasing the number of shares in circulation, bonus issues often make the share price more affordable for new investors, thereby improving the stock’s liquidity in the market. 

Another major benefit, especially for Indian investors, is that there is no tax liability at the time of receiving bonus shares—capital gains tax is only applicable when you eventually sell the shares. 

Lastly, bonus shares provide a psychological advantage to investors. Being rewarded with additional shares creates a sense of loyalty and confidence in the company, encouraging long-term holding and reducing the urge to sell quickly. This can contribute to a more stable shareholder base and sustained market interest in the company.

Conclusion

Bonus shares are a powerful tool used by companies to reward shareholders and maintain investor confidence. If you’re investing for the long term, bonus shares can slowly but surely boost your overall holdings.

So, the next time you see a company announce a bonus issue, remember – it’s not just free shares, it’s a sign of the company’s financial strength and commitment to its shareholders.