Bonus shares are additional shares issued to existing shareholders by a company without any additional cost. They are distributed in proportion to the number of shares already held by an investor. Companies issue bonus shares as a way to reward their shareholders while capitalizing a portion of their retained earnings.
What are Bonus Shares?
Bonus shares, also known as scrip dividends, are free shares given to existing shareholders instead of cash dividends. This helps companies reinvest profits into business growth while still rewarding their investors.
Why Do Companies Issue Bonus Shares?
- Enhance Liquidity – Increasing the number of shares in circulation enhances trading activity.
- Increase Shareholder Value – It provides long-term benefits to investors.
- Reward Shareholders – Encourages long-term investment in the company.
- Capital Restructuring – Helps restructure reserves and equity capital.
- Psychological Impact – Makes shares more affordable and attractive to retail investors.
How Bonus Shares Work
- A company announces a bonus ratio, such as 1:2, meaning a shareholder receives one additional share for every two shares held.
- Bonus shares do not change the total market capitalization of the company.
- The stock price adjusts accordingly post-allotment.
Key Features of Bonus Shares
- No Additional Cost to Shareholders – Investors receive them free of charge.
- Proportional Distribution – Issued based on the number of shares owned.
- Retained Earnings Utilization – Instead of paying cash dividends, companies distribute shares.
- No Impact on Overall Wealth – While individual share value decreases, total investment value remains unchanged.
Advantages of Bonus Shares
- Increases Shareholding – Investors receive more shares at no cost.
- Long-Term Investment Benefits – Attracts long-term investors.
- Improves Market Perception – Indicates company confidence in future growth.
- Higher Liquidity – More shares in the market enhance trade volume.
- Tax Benefits – No immediate tax liabilities compared to cash dividends.
Disadvantages of Bonus Shares
- No Immediate Cash Benefit – Unlike cash dividends, shareholders do not receive direct income.
- Stock Dilution – More shares lead to a lower price per share.
- Lower Dividend Per Share – If total dividend payout remains the same, per-share dividend reduces.
- Possible Overvaluation – May create unrealistic expectations about future growth.
How to Qualify for Bonus Shares
- Shareholding Record Date – Investors must hold shares before the record date set by the company.
- Ex-Bonus Date – Investors buying shares on or after this date will not be eligible.
- Holding Period – Investors should maintain their shares to be eligible.
Difference Between Bonus Shares and Stock Split
| Feature | Bonus Shares | Stock Split |
|---|---|---|
| Definition | Free shares issued to shareholders | Splitting of existing shares into multiple shares |
| Impact on Market Cap | No change | No change |
| Effect on Share Price | Reduces proportionally | Reduces proportionally |
| Dividend Impact | Total payout remains the same | Unaffected |
Impact of Bonus Shares on Investors
- Increased Shareholding – More shares mean a larger stake in the company.
- Long-Term Wealth Creation – Ideal for investors seeking compounding growth.
- Psychological Market Effect – Encourages more retail investor participation.
Recent Trends in Bonus Share Issuance
Many companies, especially in high-growth sectors like technology and pharmaceuticals, have adopted bonus share distribution to retain investor confidence. Recent market trends indicate that investors view bonus shares favorably, often leading to a short-term price rally before the ex-bonus date.
Bonus shares are a strategic tool companies use to reward shareholders while reinvesting profits into business growth. While they do not provide immediate cash benefits, they increase shareholding and improve liquidity. Understanding their impact on portfolio valuation and long-term wealth creation is essential for making informed investment decisions.
