BONUS SHARES: MEANING & EFFECTS

Announcement of Stock Bonus issues often leave a lot of unanswered questions in the mind of investors. Questions like   

• What is a stock bonus issue? 
• What happens to the existing shareholders during a stock bonus?  

• How do I become eligible for a stock bonus issue? 
• Why does my portfolio show a loss due to the bonus issue?  

To know the answer to one or more of the above questions read this article:   

What is bonus shares? 

Bonus shares means the additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are the company's accumulated earnings 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 the number of shares held to the number of shares outstanding. Companies issue bonus shares to encourage retail participation and increase their equity base. When the price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. An increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared. 

Consider this example: 

If you’ve bought one share for ₹1,000 and the company declares a 1:1 bonus, it means that you will now get 1 free share for every 1 share you own. 

Now, does that mean you will have 2 shares worth ₹1,000 each? Of course not. The stock price will come down in a similar proportion. A ₹1,000 stock will come down to the ₹500 (1000/2) ranges because now you will have 2 shares on the same investment of ₹1,000 

Who is eligible for a Stock bonus issue? What is Record date & ex-date?

Investors who ‘hold’ the shares of that company before the record date are eligible for the benefits of a stock bonus. 

The Record date is the cut-off date on or before which you need to have the shares in your Dematto be eligible for the benefits of splits and bonuses. 

Ex-Date is usually one or two business days before the record date. In India the settlement cycle of shares is T+2 days, therefore, to benefit from the corporate action, you’ll have to buy the stock at least 1 day before the ex-date so that the stocks get credited to your Demat account on the record date. 

How do I become eligible for a Shares Bonus issue? 

A Company has decided 14th as its Record date for the purpose of finalizing eligible shareholders for bonus share issue. So, the Ex-date for this share will be 13th. Therefore, if you buy the shares this company on 12th those shares should be credited to your Demat account on 14th (i.e., the record date) thus making you eligible for the bonus issue. [Note: The example is assuming consecutive business days] 

When will my Bonus shares be credited? 

For Bonus shares to be credited to your Demat account it generally takes 15 days from the Record date, but this depends on the RTA (Registrar & Share Transfer Agents). You will receive a notification from CDSL when your bonus shares get credited to your Demat. [Note: Bonus shares first get credited under a temporary ISIN and will not be admitted to trading immediately. It usually takes around 4-5 days for the shares to move from the temporary ISIN to the permanent ISIN after getting the approval for trading]. The bonus shares will show up on the trading terminal only after they are approved for trading. 

Why does my portfolio show a loss due to the bonus issue?  

When a bonus is issued, the share price reduces by the factor based on the ratio of the issue, but the investment value of the held stocks doesn’t change & the remaining value is given to you in the form of bonus shares. 

If the bonus shares eligible is not in whole numbers, the balance amount will be credited to the registered bank account. 

Until the bonus shares are credited to your Demat, your holdings will show an ‘assumed/temporary’ drop in P&L. Once the bonus shares are credited to your Demat, your P&L will be restored to its correct value. 

Let’s Consider an example to understand how the portfolio of someone eligible for stock bonus issue might alter: 

You Buy 10 shares at ₹ 1,000 per share. 

Initial investment value = ₹10,000 

Let’s assume that after some time stock price appreciates to ₹1,200: 

Current Market Price= ₹1,200 (per share) 

Current Investment value= ₹12,000 (1,200*10) 

(Portfolio P&L:- Profit≈ 20%) 

After Stock Bonus issue (Bonus Ratio- 1:1) 

Quantity of shares in your Demat account= 10  

Current Market Price = ₹600 [bonus issue of 1:1 means you received 10 bonus shares on your existing 10 shares] 

On Record date: 

Quantity= 10 (Since bonus shares haven’t been credited to your account yet) 

CMP = ₹600 

Initial Investment Value= ₹10,000 

Current Investment Value= ₹6,000 (600*10) 

Portfolio P&L: Loss ≈ 40% 

Your portfolio might show an artificial loss as the bonus shares haven’t been credited to your Demat account yet. 

Now, let’s assume it takes 15 days after the Record date to credit your Bonus shares: 

15 Days after Record date- 

Quantity= 20 (Bonus shares have now been credited to your Demat account) 

CMP= ₹ 600 

Initial Investment Value= ₹10,000 

Current Investment Value= ₹12,000 (600*20) 

Portfolio P&L: Profit ≈ 20%  

The ‘true’ value of your portfolio would be reflected once these shares have been credited to your Demat account. 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.