When companies make profits, they often reward their shareholders in some ways. The most common way is by paying dividends. The dividend is nothing but the distribution of a portion of the company's profit to its shareholders.
However, some companies prefer rewarding their investors in ways other than distributing cash. One such method is by issuing bonus shares. But what exactly is a bonus issue, and when are they credited to your Demat account? Read on to find out.
What Are Bonus Shares?
Bonus shares are additional shares issued by companies to their existing shareholders. Such shares are free of cost to the shareholders, hence the name 'bonus.' Companies can issue them out of their current profits or previous reserves.
The number of bonus shares shareholders receive will depend on their existing holdings in the company. Companies typically issue them in fixed ratios such as 1:1, 2:1, 3:1, etc. A bonus issue of 2:1 means that you will get two additional shares for each share held in the company.
For instance, let's say that you hold 1000 equity shares of a company that has announced a bonus issue of 2:1. Now, your total shareholding after the bonus issue would be 3000 shares (1000 original holding + 2000 bonus issue).
Now here's an interesting thing to note. Unlike IPOs and right shares, you need not apply for bonus shares to receive them. Instead, the company automatically credits them to your account. But by when are bonus shares credited in the Demat account? And is everyone eligible to receive additional shares? Let's find out below.
Who Are Eligible to Receive Bonus Shares?
We know that bonus shares are allotted to existing shareholders. But shares of listed companies are bought and sold daily on stock exchanges. This causes continuous change in their existing holders. So how do corporates decide who gets the bonus share?
To avoid such confusion, companies also announce a cut-off date, called the record date, along with the bonus issue announcement. Only those who appear on the company's list of shareholders on the record date are eligible for bonus shares.
What if you buy the shares on the record date? Will you be eligible for bonus shares? The answer is no. This is because India uses a T+2 rolling settlement. You will appear on the company's record only two days after purchasing shares.
Therefore, you must purchase the share two days before the record date to be eligible for bonus shares. That date is called the ex-date. It is the last day to buy the company's stock to qualify for bonus shares. A person joining the company after the ex-date is not eligible for bonus shares.
When Will Bonus Shares be Credited to the Demat Account?
On the record date, the company's bookkeepers review their list to identify the eligible shareholders. Then they will allot International Securities Identification Number (ISIN) to all bonus shares. The company credits the additional shares to your Demat account upon completing this procedure.
It can take 15 days from the record date to get the bonus shares credited to your Demat account. You will receive a text message from CDSL (Central Depository Services (India) Ltd) notifying the credit of the shares to your Demat account.
If the bonus shares are not credited to the Demat account even after 15 days, you should immediately contact your company's customer care for clarification.
Benefits of Bonus Shares to Shareholders
Listed shares are often high-priced. This makes it difficult for shareholders to increase their investment even if they want to. However, the issue of bonus shares increases their share base in the company without having to bear any additional cost.
As the company grows, its share price increases. So the free additional shares will multiply your investment in the long run. You can sell them in the secondary market at a high price and earn a handsome return.
From the company's perspective, bonus shares improve liquidity by decreasing share prices. This happens because the share price is now divided among a larger number of shares. The lower price encourages greater retail participation in the company's equity.
Watch Out For These Upcoming Bonus Issues
Due to great post-pandemic performance, Indian companies issued a record number of bonus shares in 2022. A whopping 73 companies had declared bonus shares till July. Going by this rate, the bonus share issue in 2022 could exceed the count of 78 issues in 2018, the highest in recent years.
Indian Oil, Ajanta Pharma, Minda Industries, REC, IOC, Nazara Technologies, and Torrent Pharma are some big names that have issued or announced bonus shares this year.
Further, four small-cap companies, M Lakhamsi Industries, Ruby Mills, Samvardhana Motherson International Ltd, and Yug Decor, have recently announced bonus issues and will intimate the record date soon.
Wrapping Up
Bonus shares can form an excellent reward for long-term shareholders. But one has to purchase the company's shares within the ex-date to be eligible for the same. Though companies keep a window of 15 days to credit the bonus shares to your account, they arrive much sooner most times.
FAQ's
What is a bonus share?
Bonus shares are additional shares issued for no charge to the existing shareholders in proportion to their current holding. They are issued in ratios such as 1:1, 2:1, 3:1, etc. They are automatically credited to your Demat account if you are eligible on the date of the bonus announcement.
What is a record date?
The record date is the cut–off date announced by companies to decide who is eligible to receive bonus shares. The announcement of this cut-off date becomes necessary because listed company shares are continuously traded in the secondary market, causing a frequent change in shareholders. Only those who make it to the company's shareholders list on record date become eligible for bonus shares.
What is an Ex-date?
Ex-date is the last date to buy a company's share to appear in their list of shareholders on the record date. Stock exchanges in India follow the T+2 settlement. So to be eligible to receive a bonus, one has to buy shares two days before the record date. Those joining the company after the ex-date will not appear on the list of shareholders on the record date and hence, will not be eligible for the bonus.
How long does it take for bonus shares to get credited to your Demat account?
It can take up to 15 days from the record date to get the bonus shares credited to your Demat account. Once credited, you will receive a text message from CDSL notifying you of the same. If the bonus shares are not credited to the Demat account even after 15 days, you should immediately contact your company's customer care for clarification.
Do bonus issues decrease the market value of shares?
Bonus issues increase the outstanding number of shares but reduce the market value per share. However, the face value of the share will remain the same.