Bonus Shares are additional shares provided to an existing investor of a listed or unlisted company for free of cost. These shares are equal to existing shares of the company, it means investors holding bonus shares are equally beneficial to the benfits of existing shares in case of dividend payment, voting rights etc. Whenever company declares bonus share it make announcement to the public through stock exchanges by issuing notification, for example these notification shows bonus issue in the ratio of 2:1, it means every 1 existing share is liable to receive 2 new share which results in 3 shares in the end.
Why companies issue bonus shares?
Capitalizing Profit and Reserves
The main reason for issuing bonus share is to capitalize the profits and reserves available in the books of the company. By Capitalizing the profits or reserves company can show its balance sheet more attractive to the investors and the lenders of the company.
Showing the investors the company is performing well
By issuing bonus shares the company shows the existing investors that the company is profitable in business and can capitalize its profit to grow the business more.
Increasing the liquidity of shares in the market by decreasing the price of share
Liquidity increases automatically whenever a company issues bonus share in the market . it happens due to ex bonus adjustement in the price of the share on stock exchanges according to the bonus ratio. also liquidity increases because more participation by retail investors in the market. This happens because existing investors starts to book partial profit from the stock investment and new entry from the retail investors who were not able to invest in the company due to high share price.
Increase in Share Price of the Company
It is generally oberserved that the share prices of the company increases automatically due to more participation from retail investors.
Things you should know about Bonus Issue
Who is eligible to receive the bonus share
Every investor who holds the shares in demat form on the bonus record date
Taxation on Bonus Share
In every country taxation is different in case of bonus shares. if we talk about India then in India if you sell the Bonus shares then you are liable to pay short term or long term capital gain taxas on the selling value of bonus shares. Yes you have read it right you have to pay tax on whole selling amount of the bonus share according to the Indian Income Tax Laws. for clarification on taxation on bonus share you can take help of your CA or you can also contact us on Whatsapp.
