Mundle Venkatraman & Associates

A note on Bonus Shares

By: Sakina Bohra - 2nd June, 2023

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Bonus shares, also known as scrip dividends or capitalization issues, are an essential aspect of the Indian stock market. They serve as an attractive incentive for shareholders and have gained considerable popularity among investors. In this article, we will delve into the concept of bonus shares, exploring their benefits, implications, and the regulatory framework governing their distribution in India.

What are Bonus Shares - Bonus shares are additional shares allotted to existing shareholders of a company, free of charge, in proportion to their existing holdings. It means that shareholders receive extra shares without making any additional investment. The distribution of bonus shares is based on the company's accumulated profits or reserves, which are converted into additional equity shares.

Benefits for Shareholders:

Increased Ownership - Bonus shares increase the number of shares that shareholders have in a company. This helps them accumulate more wealth over a long period of time.
Enhanced Liquidity - Bonus shares provide greater liquidity as they increase the number of shares available in the market. This improved liquidity allows for easier buying and selling of shares, benefiting shareholders and contributing to market efficiency.
Price Adjustment - When bonus shares are given out, the price of each share goes down by a certain amount. This means that even though the total value of your investment stays the same, each individual share becomes less expensive. This lower price can make the shares more affordable and appealing to new investors, potentially attracting them to invest in the company and thereby increasing the market value of the shares due to increased demand.
Confidence - Companies often issue bonus shares as a means to reward existing shareholders and reinforce their confidence in the company's future prospects. The issuance demonstrates the management's belief in the company's growth.

Implications for Companies:

Effective utilization of Retained Earning - By issuing bonus shares, companies utilize their retained earnings or accumulated reserves for the benefit of This strategy helps the company maintain a healthy capital structure and improve its financial health.
Dilution of Earnings per Share (EPS) - Bonus shares increase the total number of outstanding shares, which can dilute the company's EPS. However, this dilution is offset by the potential positive impact on the company's share price and market.

Regulatory Framework in India - Bonus shares in India are governed by the Companies Act, 2013, along with regulations from the Securities and Exchange Board of India (SEBI). The regulations outline the criteria for issuing bonus shares, such as profitability, reserves, and compliance with necessary disclosure requirements.

Conclusion

Bonus shares serve as an advantageous instrument in the Indian stock market, offering a number of benefits to shareholders while allowing companies to utilize accumulated profits. The issuance of bonus shares enhances shareholder value, improves liquidity, and reinforces investor confidence. As an investor, it is crucial to understand the implications and regulatory framework surrounding bonus shares to make informed decisions regarding investment strategies.

Disclaimer

The Blogs published in this website are for educational purposes only. It is meant to give you a general information and a general understanding of the topics discussed therein and not to provide you or any person any professional advice thereof. By using this website you understand that there is no professional relationship between you and Mundle Venkatraman and Associates (MVA) or with any of its partners, associates or employees. Any information available on this website should not be used as a substitute for competent professional advice.

A note on Bonus Shares

A note on Bonus Shares

By: Sakina Bohra - 2nd June, 2023

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