Written by Bonus shares are a popular method used by companies in India to reward their existing shareholders. Instead of paying out cash dividends, companies issue additional shares, providing shareholders with more equity in the company. Bonus shares are issued from the company’s reserves, and they can be a powerful tool for both companies and investors.
What Are Bonus Shares?
Bonus shares are additional shares given to existing shareholders free of cost. These shares are issued by companies out of their accumulated profits or reserves. The company offers bonus shares in a specific ratio, such as 1:1, 2:5, or any other ratio. For example, if a company declares a 1:1 bonus, it means that for every share an investor holds, they will receive one additional share.
Bonus shares do not involve any cash outflow, which makes them an attractive way for companies to reward shareholders while conserving cash for business expansion and other needs.
Benefits of Bonus Shares for Shareholders in India
- Increased Equity Without Additional Investment
One of the primary benefits of bonus shares is that they allow shareholders to increase their equity in the company without spending any additional money. When a company issues bonus shares, the number of shares an investor owns increases according to the declared ratio. This means that if you hold 100 shares and the company issues a 1:1 bonus, you will receive an additional 100 shares at no cost.
This increase in the number of shares is particularly beneficial for long-term investors, as it allows them to accumulate more equity in the company over time. While the market price of the shares might adjust downwards after the issue, the overall value of the investor’s holdings remains intact.
Example: Consider a company like Tata Consultancy Services (TCS), which in 2018 issued a 1:1 bonus share. If an investor held 100 shares of TCS before the bonus, they would now hold 200 shares, effectively doubling their ownership without any additional financial investment. Over time, if TCS continues to grow, the investor benefits from the increased number of shares.
- Tax Benefits for Investors
In India, bonus shares are not taxable when they are issued. Investors do not have to pay tax at the time of receiving the bonus shares. The tax liability arises only when the shares are sold. If the investor holds the bonus shares for over a year before selling, they are subject to long-term capital gains (LTCG) tax at a rate of 10%, which is lower than short-term capital gains tax.
This makes bonus shares an attractive option for investors looking to grow their investment over time without facing immediate tax burdens.
- Increased Market Liquidity
When a company issues bonus shares, the number of shares in circulation increases. This can result in better liquidity for the stock, meaning it becomes easier to buy and sell shares. Greater liquidity can attract more investors, which can contribute to a more active and healthy stock market for that company.
For instance, companies with large numbers of shares and higher market capitalization tend to be more attractive to institutional investors, which could lead to a more stable and growing stock price.
- Signaling Financial Strength and Stability
Bonus shares often signal that the company is in good financial health. Issuing bonus shares implies that the company has accumulated profits or reserves and is willing to distribute some of them among its shareholders. This is seen as a positive sign by the market, as it suggests that the company is confident in its future growth prospects.
For example, companies like Reliance Industries and Infosys have often issued bonus shares as a sign of financial robustness and to reward loyal investors. This act of rewarding shareholders can boost market confidence and improve the company’s image in the eyes of investors.
- Enhanced Shareholder Loyalty
Bonus shares are also a way for companies to retain their shareholders by offering them additional value. Since bonus shares are given to current investors based on their existing holdings, it is a form of acknowledgment and a reward for their loyalty. Shareholders who receive bonus shares may feel more connected to the company, which can lead to long-term investments.
- Improved Stock Value Over Time
While the price of a share typically decreases immediately after the issuance of bonus shares (since more shares are now in circulation), the overall value of the company remains the same. Over time, as the company continues to perform well, the market price of the stock may appreciate, leading to higher overall returns for investors.
Bonus shares are, therefore, an effective way for companies to reward shareholders without affecting their overall market value. They can be an excellent way for investors to accumulate more shares at no cost, which can provide greater value when the stock price appreciates in the future.
Final Remarks
Bonus shares in India provide numerous benefits to shareholders, such as increased equity without additional investment, tax benefits, improved liquidity, and signals of financial strength from the company. For companies, issuing bonus shares helps preserve cash, attract new investors, and increase shareholder loyalty.
Investors, especially long-term ones, find bonus shares an excellent tool to accumulate more shares of a company, which could lead to greater returns in the future. With companies like TCS, Infosys, and Reliance leveraging bonus shares to reward their investors, it’s clear that this strategy is both beneficial and effective.
Overall, bonus shares remain an important part of the investment landscape in India and offer significant advantages for both companies and investors.
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