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Bonus issues are a widely used corporate action in the Indian stock market, and they often create a buzz among investors. But what exactly is a bonus issue, and why do companies opt for it? In this crisp blog, we'll explore the intricacies of bonus issues, their impact on both companies and investors, and look at the important considerations when analyzing them.
At its core, a bonus issue, also known as a stock bonus, involves a company issuing additional shares to its existing shareholders, free of cost, in proportion to their existing holdings. This means that if you own 100 shares of a company and it announces a 1:1 bonus issue, you'll receive an additional 100 shares without any cash outlay. It's important to note that a bonus issue doesn't change the overall market capitalization of the company, it only increases the total shares outstanding.
Companies decide to issue bonus shares for several reasons:
Fundamentals: Bonus issues do not affect fundamentals directly. As new shares are issued, the share price goes down proportionately. For example, if 1:1 bonus shares are given, then after the bonus, the share price will decrease by half. One important thing to remember here is that the market capitalization of the company does not change with the issue of bonus shares.
As the total number of shares goes up, per-share metrics (EPS, Book Value per share) go down.
On the financial statement “issued share capital” goes up as new shares are issued to shareholders. The company can use the free reserve, securities premium reserve, or capital redemption reserve account to issue bonus shares.
Investor Sentiment: Bonus issues can create a positive sentiment among investors, as they may perceive it as a sign of company confidence and a potential increase in share value.
Before jumping into the excitement of bonus issues, investors should keep these considerations in mind:
Tax Implications: While bonus shares are tax-free when issued, they can have tax implications when sold, so keep that in mind.
Risks: Understand that a bonus issue doesn't change the company's underlying fundamentals. Consider it similar to dividends. It's important to analyze other aspects of the company's health like financial position and risks.
Long-term Outlook: Assess the company's long-term growth potential, as bonus issues alone should not be the sole basis for investment decisions.
You can check for the bonus issue of any company on sharpely. Just search the company and go to the ‘Fundamentals’ section. On the left, you will see the “Corporate Action” tab. Just hit on that and click on the “Bonus”. That is it! Now you can see the history of the bonus shares issued by the company along with important dates and ratios.
A bonus issue is a strategic corporate action designed to improve accessibility and liquidity, and reward shareholders. While their influence on fundamental aspects is quite restricted, understanding the reasons for bonus issues equips investors with valuable insights for making well-informed choices. It is crucial to view bonus issues as integral components of a broader financial context and assess them considering the company's performance and growth prospects.
