A bonus can be defined as
something given as a present or gift for good performance. Something given that
is over and above the normal. From an investment or share market perspective, a
Bonus issue of shares is when a company issues shares for free. The company
does not get any money from the shareholder for the issue of such bonus shares.
A company which has performed very well for several years and which has got huge
reserves can issue bonus shares. Companies normally announce issue of bonus
shares when reaching or attaining certain milestone. This could be the company completing
a certain number of years in operations (10 years, 25 years, 50 years, etc), performance
or profitability reaching certain levels (Turnover or Net Profit reaching a
milestone level), so on, so forth.
When a bonus issue is made the
shareholders get certain additional free shares of the company in the same
ratio of their holding in the company before the issue.
Bonus issue is normally in terms
of number of shares declared as bonus to the number of shares held by the share
holder in the company. For instance, a bonus declaration of 1:1 means that for
each share held in the company the share holder is entitled to one additional free
share, or in case of a 1:2 bonus declaration, the share holder would get 1 additional
free share for every 2 shares held in the company.
What happens when a company declares bonus shares? When a company declares bonus shares, the company’s issued capital increases. The number of shares available in the hands of the share holders increases proportionately to the number of shares already held by them. If the company is listed on a stock exchange the supply of share of the company in the exchange increases. The price of the company’s share after issue of bonus share normally falls proportionately in respect of the price before the bonus. For instance if the price is Rs 5,000/- before the declaration of the bonus and the company declares bonus in the ratio of one share for every two shares held, the price of the share after the bonus would fall to roughly Rs 3,334/- (i.e. Rs 5,000 * 2/3) Investors who could not buy the shares earlier because these shares are costly, can now buy the share as the share price would have reduced and also because more supply of shares would have come into the market. The share price normally does not fall exactly in proportion to the bonus issue. The proportionate price would slightly be more after the bonus issue, as the euphoria of bonus plus the additional demand for the share tends to push up the price.
Why do companies declare bonus shares? There could be several reasons why a company’s management would decide to declare a bonus issue of shares. Some of the common reasons are : (1) Increasing free float (number of shares available for trading or increasing the liquidity of shares in the exchange), (2) spreading the hold or encouraging more retail participation (making the expensive shares more affordable to investors who want to invest but could not as the shares are priced very high), (3) increasing the equity base (number of equity shareholders in the company), (4) to display confidence to the investing community that the company can service a larger shareholder base, (5) Privately held company declaring huge bonus and making the share price attractive before going public and listing their shares in the exchanges. (6) When companies are unable to declare dividend to its shareholders.
When declaring a bonus issue the
company’s management take into consideration several factors. (1) Availability
of sufficient reserves. Since bonus shares have to be issued out of the free
reserves of the company, it has to ensure that there are sufficient reserves available
when calculating the bonus ratio. (2) The company must have sufficient authorised
capital to accommodate the bonus issue. (Authorised Capital is the figure
beyond which the company cannot raise its capital.) Otherwise the company has
to increase its authorised capital before going ahead with the bonus issue. (3)
The company declaring a bonus issue has to be reasonably sure that it would be
in a position to declare dividends (service equity) on the enhanced capital
after issue of the bonus shares. (4) A company registered under the (Indian) Companies
Act has to ensure that, the company should not have defaulted in payment of interest
or principal of any debt security issued by it and in payment of statutory dues
of its employees like Provident Fund, gratuity, etc. (5) A company registered
under the (Indian) Companies Act has to follow the guidelines issued by the
Securities and Exchange Board of India (SEBI)
Who is eligible for Bonus
shares? An investor who holds share of the company (declaring the bonus issue)
as on the “record date” is eligible to receive the bonus shares.
Record date is the cut-off date set
by the company. A record date is set for the company to draw a list of eligible
shareholders to whom the bonus shares are to be allotted.
When can the bonus shares be
sold in the stock exchange? The company issuing the bonus shares has to apply
for and get the bonus shares listed in the stock exchange. Once these are
listed and they are available in the shareholder’s account they can be sold
like any other shares.
If the shareholder decides to hold the bonus shares, he becomes entitled to dividends and other rights that are available to the owner of the original shares.
No comments:
Post a Comment