Bonus Shares – Meaning, Types & Advantages of Bonus Shares

Bonus shares are the additional shares that a company gives to its existing shareholders on the basis of shares owned by them. Bonus shares are issued to the shareholders without any additional cost.

Let us learn why companies issue bonus shares.

Why Do Companies Issue Bonus Shares?

Bonus shares are issued by a company when it is not able to pay a dividend to its shareholders due to shortage of funds in spite of earning good profits for that quarter. In such a situation, the company issues bonus shares to its existing shareholders instead of paying dividends. These shares are given to the current shareholders on the basis of their existing holding in the company. Issuing bonus shares to the existing shareholders is also called capitalization of profits because it is given out of the profits or reserves of the company.

Calculation Of Bonus Shares

The bonus shares are given to the existing shareholders according to their existing stake in the company. For example, a company declaring one for two bonus shares would mean that an existing shareholder would get one bonus share of the company for every two shares held. Suppose a shareholder holds 1,000 shares of the company. Now when the company issues bonus shares, he will receive 500 bonus shares (1,000 *1/2 = 500).

When the company issues bonus shares, the term “record date” is used along with it.

What Is Record Date?

Record date is a cut-off date set by the company. If you are the owner of the shares of the company on this cut-off date then you are eligible to receive the bonus shares. The record date is set by the company so that they can find the eligible shareholders and distribute bonus shares to them.

Advantages Of Bonus Shares

• There is no need for investors to pay any tax on receiving bonus shares.

• It is beneficial for the long-term shareholders of the company who want to increase their investment.

• Bonus shares enhance the faith of the investors in the operations of the company because the cash is used by the company for business growth.

• When the company declares a dividend in the future, the investor will receive a higher dividend because now she/he holds a larger number of shares in the company due to bonus shares.

• Bonus shares give positive signs to the market that the company is committed towards a long term growth story.

• Bonus shares increase the outstanding shares which in turn enhances the liquidity of the stock.

• The perception of the company's size increases with the increase in the issued share capital.

Since there are many advantages of bonus shares, let us now learn the conditions for the issue of bonus shares.

Conditions For Issue Of Bonus Shares

The issue of bonus shares must be recommended by the resolution of the Board of Directors. Also this recommendation must be later approved by the shareholders of the company in the general meeting. The Controller of Capital Issues must give permission to the issue. The aforementioned are conditions that a company must fulfil to issue bonus shares. To be eligible for the different types of bonus shares you must hold the shares of the company in the demat account. If you want to open a demat account, you can consider Kotak Securities. We are the leading broking firm of India that provides premium services to the clients at the most affordable rates.