What Is Stock Bonus?

A bonus issue, also known as a bonus share, is when a company issues additional shares to its existing shareholders without any cost. These shares are given as a bonus or reward to the shareholders, in proportion to their existing holdings. The purpose of a bonus issue is to increase the number of shares outstanding while maintaining the proportionate ownership of shareholders.

For example, let's say a company announces a bonus issue of 1:1. This means that for every share held by an investor, they will receive an additional share as a bonus. If an investor holds 100 shares before the bonus issue, they will receive an additional 100 shares as a bonus, resulting in a total of 200 shares.

Bonus issues are typically carried out by companies when they have accumulated sufficient retained earnings or reserves. By issuing bonus shares, companies can enhance shareholder value by increasing the liquidity of their shares and making them more affordable.

It's important to note that the market price of the stock adjusts proportionately after the bonus issue. For instance, if the stock is trading at Rs. 100 per share before the bonus issue, the price per share would be halved to Rs. 50 after the issue, assuming a 1:1 bonus.

It's always advisable to refer to official company announcements, regulatory filings, and consult with financial professionals for specific information regarding bonus issues or any other corporate actions in the Indian stock market.

1.    Purpose: Companies in India often utilize bonus issues as a means to reward their shareholders without distributing cash dividends. Instead of providing a cash payout, they issue additional shares to existing shareholders as a bonus.

2.    Reserves and Surplus: Bonus issues are typically funded from the company's accumulated reserves and surplus, which are built up over time through retained earnings. These reserves represent the company's profits that have not been distributed as dividends.

3.    Shareholder Benefits: Bonus issues offer several benefits to shareholders. Firstly, they increase the number of shares held, which can potentially enhance liquidity and improve trading activity. Secondly, bonus issues are generally perceived positively by investors as they indicate the company's financial strength and confidence in its future prospects. Lastly, bonus shares also provide an opportunity for investors to increase their overall ownership in the company without requiring additional investment.

4.    Tax Implications: In India, bonus issues are generally tax-free for shareholders. The cost basis of the existing shares is adjusted to reflect the bonus shares received. When the bonus shares are eventually sold, the capital gains tax is calculated based on the adjusted cost basis.

5.    Regulatory Approval: Bonus issues in India require approval from the company's board of directors and shareholders. Companies must comply with the guidelines and regulations set by the Securities and Exchange Board of India (SEBI) for conducting bonus issues.

It's important to note that bonus issues are just one type of corporate action in the Indian stock market, and they should be considered in conjunction with other factors when making investment decisions. Additionally, the specific details of bonus issues, such as the ratio and record date, are determined by individual companies and may vary. Therefore, it's advisable to refer to official company announcements and consult with financial professionals for accurate and up-to-date information regarding bonus issues in the Indian stock market.