How will I get benefitted from the bonus issue?

Everyone loves receiving gifts. Even companies have a way to gift their shareholders for showing faith in them through bonus issues. Let’s try to understand the benefits one gets from a bonus issue.

Let’s first understand what is a bonus issue

Bonuses are gifts issued by a company to reward their existing shareholders for holding on to their shares by showing faith in the company’s propositions, values and future outlook.

Bonus issues are distributed to the shareholders in a certain ratio against the shares that they already hold.

If the ratio is 2:1, then the shareholders get 2 additional shares for every single share they hold, completely free of cost. So, if you hold 100 shares in a company and they decide to issue a bonus, you get 200 more shares as a gift and now you finally hold 300 shares in total.

You also need to remember that only existing shareholders are eligible for receiving these bonus shares. The company puts out a pre-determined record date before which investors must hold the company’s shares in their DEMAT accounts. So, if you bought the shares of a company after the record date, you will not be eligible to receive the bonus shares.

You may now wonder about the impact a bonus issue has on the stock price and the market capitalization of the company. Let’s answer that.

After a bonus issue, the number of shares outstanding in the market increases and due to that the price per share reduces proportionately. This does not impact the market capitalization or the value of all outstanding shares of the company; it remains the same as it was previously before the bonus issue.

Let’s now come to the reasons why a company may issue bonus shares.

The primary reason behind a company issuing bonus shares is to reward the existing shareholders. Other than this, if a company had a good amount of cash on their books but don’t want to distribute these gains, then it may distribute these additional cash in the form of bonus shares instead of paying out dividends.

As we discussed previously, the number of outstanding shares in the market increases with a proportionate decrease in the price per share after issuing a bonus. This makes the shares more affordable for smaller investors to buy thereby increasing the liquidity of the shares and the shareholder base of the company as well.

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Let’s finally get to the question you’ve been waiting for. As an investor, what are the advantages you get out of the bonus issue of a company?

If you plan on holding on to the company’s stock in the long-term, bonus shares can be very fruitful as they hold the potential to amplify the capital invested by you exponentially.

This is because it is likely that the company’s stock value will rise due to higher earnings and revenue in the future, as a result, company may issue more bonus shares down the line.

On top of this, if the company pays dividends on their stock in the future, you as an investor are bound to receive more of these dividends.

A very good example of a company issuing bonus shares is Infosys. If you had bought 100 shares of Infosys back in 1993 at a price of Rs.145 per share, then after 25 years, your shares would’ve increased in number to 51,200 shares due to multiple bonus issues and their value would’ve been worth more than Rs.7.5 crores.

On top of these bonus issues, the company’s share price also witnessed an appreciation in value due to the company’s exemplar performance in the software industry throughout all these years.

All in all, if you hold shares of a company which has high prospects of witnessing growth in the future and is likely to issue bonus shares as well, then it is highly probable that your initial investment may end up giving you exponential returns.

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On an ending note, here’s a little checklist for you to keep in the back of your mind:

• Bonus issues are freely given out to the investors in a certain ratio against their current holding and are a reward from the company for showing trust in the company’s goals and management.
• They may boost your portfolio if you hold on to the shares long-term.
• You get more dividends if the company pays it out in the future.
• They increase the demand in the market and subsequently the price of the stock while also boosting liquidity.
• They reduce the barrier of entry for small investors due to the reduction in the share price after a bonus issue.

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 - 2288 2460, 022 - 2288 2470.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  Investments in securities market are subject to market risks, read all the related documents carefully before investing. 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 are solely for informational and educational purpose.