What are the Bonus Shares?
Whenever a company announces a bonus shares issue, the number of shares held by investors increase in a proportion.
1:1 Bonus Shares means your no. of shares that for every share held by you, you will get an additional share. The no. of share will double.
For example, let’s say before the bonus share issue if you had a 100 share in a certain company and the company announces 1:1 bonus, you will now have 100 additional shares. So total share now will be 200.
2:2 Bonus Shares means that for every 3 shares you hold, you will get 2 additional shares. For example, let’s say you have 30+ shares in a certain company before the bonus share issue, you would now get 20 additionals shares from that certain company. So total holding for your company would be 50 shares.
Now Bonus Shares announcement does increase the total number of shares you hold. But the value of your investment remains the same.
Now, If Value of Investment remains the same, is it really a Bonus?
So the answer to this question will be YES! It benefits you in two ways.
Benefits of Bonus Shares
1. Stock Becomes More Tradable
Now as Today date (14th August 2018) the stock MRF Ltd. is trading at Rs. 73,830.05. So this is a very expensive stock for new and small investors. It becomes difficult to buy such expensive shares. And so to increase retail participation, bonus shares are announced.
So after the bonus share announcement, the stock becomes more tradable as more investors can invest and the stock would see more activity on the stock market.
2. Profit is shared via the Bonus Shares issue
Whenever a company wants to share profit with the investors, it can do it via two ways. The first way is by giving dividends and the second one is by issuing bonus shares. So this is the second benefit.
There is something called as share capital seen on the balance sheets of a company. The share capital is nothing but the money received to buy the company by issue of its shares. Now when a company declares bonus shares, the total number of stocks go up.
The share capital is calculated by multiplying the Face value and the Total number of stocks.
Share Capital = Face Value × Total Number of Stocks
So the total number of stocks go up, the share capital also have has to go up. But you have not paid anything to increase this share capital. So what is the company do is it moves to the part of its profit i.e the bonus share × face value to the share capital.
You can also say a part of the reserve self me mode. Reserve is nothing but the money kept by the company to itself to run the company into the day to day basis.
What is the Benefit of the Bonus Shares Issue To The Company?
- Bonus Share issue increases the equity base of the company. Here equity base means the total no. of outstanding stocks.
- The stock also becomes more liquid/active or tradable on the stock market.
- The bonus share issue displays the amount of confidence the company has to service a larger equity base.
Taxation of Bonus Shares
Bonus Share has come at no additional cost. So while calculating capital gains, acquisition cost is taken as ‘Zero’.
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