Everything to know about Stock Bonus issue

In the Indian share market, a bonus issue is a corporate action taken by a company to reward its shareholders by issuing additional shares at no cost. This means that existing shareholders receive extra shares without having to pay anything for them. The bonus issue is also known as a "scrip dividend" or "capitalization issue."

Imagine you own a pizza shop with some friends. Your shop is doing really well, and you have made some extra money (profits). Instead of taking that money out of the business, you decide to create more pizza slices to share among all the owners. That way, everyone will have more slices, but their share in the whole pizza will remain the same.

Similarly, a company issues bonus shares to its shareholders using its profits (retained earnings). The company converts some of its profits into new shares and distributes them among the existing shareholders. As a result, each shareholder has more shares, but their proportion of ownership in the company stays the same.

When the company increases the number of shares, it means each share represents a smaller piece of the company's overall profits. This can lead to a lower value of earnings per share (EPS), which is the profit earned per individual share. However, the total value of all the shares put together remains the same, and the ownership of each shareholder remains unchanged.

Note: In order to eligible for bonus shares, shareholders are required to possess shares on the ex-date/record date as determined by the T+1 settlement cycle. For example, if the ex-date/record date for the bonus is 10th July, shareholders must acquire the stock on or before 9th July.

Here's an example to illustrate how a bonus issue works:

Let's assume there is a fictional company called "ABC Industries Ltd," and it decides to issue a bonus in the ratio of 1:1, which means it will issue one additional share for every one share held by existing shareholders.

Before the Bonus Issue:

ABC Industries has 1,000,000 shares outstanding.

The share price is Rs. 100 per share.

Total Market Capitalization = 1,000,000 shares * Rs. 100/share = Rs. 100,000,000

After the Bonus Issue:

The company announces a 1:1 bonus issue, so for each existing shareholder who holds one share, they will receive an additional share. The total number of shares will now double since every shareholder gets one extra share for each share they already hold.

New total shares outstanding = 1,000,000 shares (old) + 1,000,000 shares (bonus) = 2,000,000 shares.

However, the share price will adjust to maintain the total market capitalization unchanged.

New share price = Old share price / (1 + Bonus ratio) = Rs. 100 / (1 + 1) = Rs. 50 per share.

After the Bonus Issue (Continued):

Total Market Capitalization remains the same:

New total Market Capitalization = 2,000,000 shares * Rs. 50/share = Rs. 100,000,000

After the bonus issue, each shareholder now has two shares for every one share they previously held, and the share price has halved from Rs. 100 to Rs. 50. The overall value of their investment remains the same. The company has rewarded its existing shareholders by distributing its accumulated profits in the form of bonus shares, increasing the liquidity of the stock and making it more affordable for retail investors.

It's important to note that bonus issues do not change the fundamentals of the company. The total ownership percentage of shareholders remains the same, and the company's assets and liabilities remain unchanged. Bonus issues are seen as a gesture of confidence by the company's management, indicating that they expect the company's future performance to remain strong. Investors generally view bonus issues positively, as they see an increase in the number of shares they hold without any additional cost.

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Frequently Asked Questions (FAQs) on Bonus Share Crediting:

How long does it take for bonus shares to be credited to my demat account?

Bonus shares are typically credited to the shareholder's demat account around 15 days from the record date. However, the exact duration may vary based on the Registrar and Share Transfer Agents (RTA) involved in the process.

How will I know when the bonus shares are credited to my demat account?

Shareholders will receive a notification from CDSL (Central Depository Services Limited) or NSDL(National Securities Depository Limited) once the bonus shares are successfully credited to their demat account.

Are the bonus shares immediately available for trading after being credited?

No, the bonus shares are initially credited under a temporary ISIN (International Securities Identification Number) and are not immediately available for trading.

How long does it take for the shares to move from the temporary ISIN to the permanent ISIN?

After receiving approval for trading, it usually takes around 4-5 days for the bonus shares to be moved from the temporary ISIN to the permanent ISIN.