Understanding Bonus Shares: A Complete Guide for Investors

Introduction

bonus shares


In the dynamic world of investing, shareholders are  frequently awarded in  colorful ways for their faith and investment in a company. One  similar  price comes in the form of  perk shares. For seasoned investors and  newcomers  likewise, understanding the conception of  perk shares is  pivotal, as it can significantly impact investment strategies and portfolio value.

In this blog post, we’ll explore what  perk shares are, why companies issue them, how they affect shareholders, their benefits and  downsides, and what investors should consider when  perk shares are  blazoned.


What Are Bonus Shares?

Perk shares are  fresh shares given to being shareholders by a company without any  redundant cost, grounded on the number of shares the shareholder  formerly owns. These are issued out of the company’s accumulated earnings or reserves. 
 
For  illustration, if a company announces a 12  perk issue, it means the shareholder will admit 1  perk share for every 2 shares held. So, if you  enjoy 100 shares, you will admit an  fresh 50 shares.

Why Do Companies Issue Bonus Shares?

There are several reasons why a company might choose to issue  perquisite shares rather of paying cash tips

1. To Award Shareholders

 perquisite shares are a way to award shareholders without reducing the company’s cash reserves. It’s  constantly viewed as a sign of strong  financial health and  future growth eventuality.
 

 2. To meliorate Liquidity

Issuing  perquisite shares increases the number of shares in the request, which can boost liquidity. This makes it easier for investors to buy and  sell shares.

 
 3. To Acclimate Share Price

When a company’s share price becomes too high, it may come less  attractive to small investors. By issuing  perquisite shares, the price per share generally decreases proportionately, making the stock more affordable and adding retail participation.
 

 4. Signal of Confidence

Issuing  perquisite shares can gesture the company's confidence in its  future earnings, as it reflects a healthy reserve position and  expectation of  continued earnings.

How Bonus Shares Affect Shareholders

One of the most common misconceptions is that receiving bonus shares automatically increases a shareholder’s wealth. While the number of shares held increases, the overall value of the holding typically remains the same immediately after the bonus issue.

Let’s break it down:

Example:

Suppose you own 100 shares of a company priced at ₹600 each, and the company announces a 1:1 bonus issue.
  • Before Bonus: 100 shares x ₹600 = ₹60,000
  • After Bonus: You now have 200 shares, but the share price adjusts to ₹300
  • New Value: 200 shares x ₹300 = ₹60,000
So, while the quantity of shares doubles, the share price halves, keeping the total investment value unchanged initially. However, in the long term, if the company performs well, the value can increase significantly.

Key Dates in a Bonus Issue

When a company announces a perquisite issue, investors should be alive of the following important dates 
 

1.  Advertisement Date

This is the date when the company declares its intention to issue perquisite shares.
 

2. Record Date 

The cut- off date to determine which shareholders are eligible to admit perquisite shares. You must hold the shares in your demat account on this date.
 

3. Ex-Bonus Date

The date from which the stock trades without the value of the perquisite share. generally, it's a day or two before the record date. To be eligible for perquisite shares, you must buy the stock before theex-  perquisite date.

Tax Implications of Bonus Shares (India Perspective)

1. No duty at the Time of Damage

When  perk shares are  distributed, there's no immediate  duty liability.

2. Capital Earnings duty on trade 

still, capital earnings  duty applies, If you  vend  perk shares. The cost of accession for  perk shares is considered zero, and the holding period is counted from the date of allotment. 
 
Short- Term Capital Earnings( STCG) If  vended within 12 months –  tested at 15.
 
Long- Term Capital Earnings( LTCG) If  vended after 12 months –  duty-free up to ₹ 1 lakh,  also  tested at 10 beyond that.

Pros and Cons of Bonus Shares

✅ Advantages:

  • Increased Shareholding: You get more shares at no cost.
  • Better Liquidity: More shares in the market mean improved liquidity.
  • Positive Sentiment: Can increase investor confidence and share price in the long run.
  • Signal of Strong Performance: Indicates company has sufficient reserves.

❌ Disadvantages:

  • No Immediate Cash Benefit: Unlike dividends, you don’t get cash in hand.
  • Stock Dilution: EPS (Earnings Per Share) may reduce, potentially affecting valuations.
  • Possible Misinterpretation: Investors might overvalue the benefit without realizing the price adjustment.

Should You Buy a Stock Just Before a Bonus Issue?

Many investors consider buying a stock just before the bonus record date to benefit from free shares. However, this strategy isn’t always beneficial:

  • Stock price adjusts post-bonus, so there's no instant monetary gain.
  • Short-term volatility may follow the bonus issue.
  • Investment decisions should be based on fundamentals, not just corporate actions.
If the company has strong growth prospects, good management, and consistent earnings, then bonus shares can be a cherry on top of a long-term investment. But if a stock is overvalued and running purely on bonus hype, it might not be worth the risk.

Real-World Example

Let’s look at a real- life illustration to understand how perquisite shares impact investors 
 
Infosys perquisite Share Issue( 2015) 

In 2015, Infosys issued perquisite shares in the rate of 11. 
  •  Before the perquisite issue, Infosys shares were trading around ₹  2,000.
  •  After the perquisite, the price shaped to around ₹  1,000.
  •  Investors entered one fresh share for every share held.
This shows how perquisite issues, combined with solid fundamentals, can be satisfying in the long run.

Final Thoughts

Perk shares are a  precious commercial action that can  profit investors — especially long- term holders.
While they do not  incontinently increase your wealth, they reflect  appreciatively on the company's  fiscal health and can lead to wealth creation over time.
 
still, it's essential to view  perk issues as part of a broader investment strategy, rather than as standalone  openings. Focus on companies with strong financials, good governance, and growth potential.However, consider it a nice  price for your trust and  tolerance, If a  perk issue comes along the way.

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