what is bonus shares?

Bonus shares are extra shares that the company gives to existing shareholders at no cost. These shares can be traded on the secondary market by shareholders to meet liquidity needs.

Sometimes, companies are unable to pay dividends in cash due to a lack of liquidity. This can happen despite having a profitable turnover. The company will issue bonus shares to current shareholders in these cases instead of paying dividends in cash. The bonus shares can be issued as additional shares or new shares at no cost, in proportion to the shareholder's shares and dividends.

Even if there is no shortage of liquid funds, companies often issue bonus shares. Certain companies use this strategy to avoid paying the high-priced Dividend Distribution Tax when they declare dividends.

The company can issue bonus shares. This is because the company's profits or reserves are converted into share capital. It is called a "capitalisation" of the profits. The bonus shares cannot be issued by the company without the consent of shareholders. The bonus share issue is paid out in a sum equal to its value. This amount is then deducted from the profits or transferred to the Equityshare Capital Account.

What is a bonus issue?

A bonus issue, also known as a bonus share issue, is a term used to describe an issue of bonus shares. A bonus issue is defined by the number of shares owned by a shareholder. Zero cash payments guarantee that liquidity is not affected by any changes.

The bonus issue results in an increase of shares, which means that the dividend per share falls. This doesn't directly impact the capital or value of the company. This does not affect the shareholder's investment, unlike in the case with Rights Issues. Because the shareholder has a greater number of shares than the income per share, this does not affect the value of the investment. The bonus share issue is designed to equalize excess assets with liabilities using the Nominal Share Capital.

Bonus shares are an assurance that the company can service its larger equity. The company wouldn't have issued bonus shares if it couldn't guarantee an increase in profits and the distribution of dividends in future. Bonus shares promote company goodwill. Companies issue bonus shares according to a constant ratio formula. This formula allows for a fixed number per shareholder depending on the number outstanding shares. Let's look at an example to help us understand the meaning of bonus shares.

Let's suppose you have 200 shares in company XYZ. The company now issues bonus shares at a ratio of 4:1. This means that you get four bonus shares for every share. For each 200 shares you own, you are entitled to 800 bonus shares.

Who is eligible to receive bonus shares?

Bonus shares are available to shareholders who have shares in the company before the record date or the ex-date as set by the company. India uses the T+2 rolling system to deliver shares. The ex-date is two business days before the record date. Investors should buy shares before the expiration date. If they do, the investor will not receive the right to the ownership of the shares at the record date. They will also not be eligible for the bonus shares.

The bonus shares are immediately credited to shareholders' accounts once a new ISIN (International Securities ID Number) has been assigned. This takes place within a 15-day period.

What is the "Record Date"?

The record date is a cut-off date that a company sets. To be eligible for a distribution, investors must own shares in the company before this date. This record date allows a company to identify eligible shareholders and send them their distributions.

Before issuing bonus shares, a company must follow certain guidelines

1. Before bonus shares can be issued, the Articles of Association must approve a bonus issue. If the Articles of Association are unable to approve a bonus issue, the company must pass special resolution at their general meeting

2. 2.In the event of a general meeting, shareholders must also approve the bonus issue

3. SEBI guidelines must be followed

4. As a result of a bonus, the company must ensure that the total share capital is not exceeded by the authorized share capital. If this happens, the Memorandum of Association's capital clause must be amended to increase the authorised capital

5. Any company that has borrowed money must inform the financial institution.

6. A company must notify the Reserve Bank before issuing a bonus.

7. All bonus shares must be paid in full. Shareholders who receive shares in part must pay.

There are advantages and disadvantages to bonus shares

Let's now look at the pros and cons associated with bonus shares after we have a better understanding of what it is.

As we know, bonus shares are issued by companies when they have cash problems. Bonus shares can also increase the company's share capital, making them attractive to investors.

Bonus shares can provide additional income for shareholders on the market side. Stocks are a form of compensation for shareholders. Additional shares on the market reduce the price per share, making them more affordable for investors.

The downside is that issuing bonus shares can be more expensive than declaring a dividend. It takes up the capital reserve of the company. The bonus shares are not released to the corporate.

Investors might be disappointed if additional shares lower the income per share. This could make stocks less appealing. They might try to sell additional shares to fund liquidity, which could lower their share of the company.

What is the difference between stock split and bonus share?

Stock splits are another way companies can increase their market share. While they sound very similar, stock split and bonus shares don't look the same. Stock splits allow companies to increase share liquidity at no cost. The cash reserve of the company remains unaffected. However, bonus shares are paid from the capital reserve.

Conclusion 
Bonus shares are the addition of free shares to existing shareholders in order to meet liquidity needs. Bonus shares are not issued new shares and don't increase the company's earnings.