Bonus shares – A positive sign.

WHAT ARE THEY?

Bonus shares are issued in a certain proportion to the existing holders. A 2 for 1 bonus would mean you get two additional shares — free of cost — for the one share you hold in the company.If you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you.

WHO BEARS THE COST IF IT’S FREE FOR ME?

You are right. There is no free lunch.Bonus shares are issued by cashing in on the free reserves (accumulated profits) of the company.A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital.So you do not pay; and the company’s profits are not impacted.

WHAT ARE THE EFFECTS OF A BONUS ISSUE?

Bonus shares do not directly affect a company’s performance. Bonus issue has following major effects.

1. Share capital gets increased according to the bonus issue ratio.
2. Liquidity in the stock increases.
3. Effective Earnings per share, Book Value and other per share values stand reduced.
4. Markets take the action usually as a favorable act.
5. Accumulated profits get reduced.
6. A bonus issue is taken as a sign of the good health of the company.

WILL THE SHARE PRICE CHANGE AFTER BONUS ISSUE?

A bonus issue adds to the total number of shares in the market.Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares.This is referred to as a dilution in equity.Now the earnings of the company will have to be divided by that many more shares.(Earnings Per Share = Net Profit/ Number of Shares)Since the profits remain the same but the number of shares has increased, the EPS will decline.Theoretically,When EPS declines, the stock price should also decrease proportionately. But, in reality, it may not happen.

That’s because:

i. The stock is now more liquid. Now that there are so many more shares, it is easier to buy and sell.

ii. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future.

THE RECORD DATE.

When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus.

After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.

HOW BONUS SHARES CREATES ENORMOUS WEALTH

Bonus shares, in the long run would create enormous wealth for the investor. For example, a Rs 10,000 invested in Wipro in 1980 would have grown into several Crores as shown below:-

In 1980 You buy 100 shares @ Rs 100 per share in your name . In 1981 company declared 1:1 bonus = you have 200 shares

In 1985 company declared 1:1 bonus = you have 400 shares. In 1986 company split the share to Rs. 10 = you have 4,000 shares

In 1987 company declared 1:1 bonus = you have 8,000 shares. In 1989 company declared 1:1 bonus = you have 16,000 shares

In 1992 company declared 1:1 bonus = you have 32,000 shares In 1995 company declared 1:1 bonus = you have 64,000 shares

In 1997 company declared 2:1 bonus = you have 1,92,000 shares. In 1999 company split the share to Rs. 2 = you have 9,60,000 shares

In 2004 company declared 2:1 bonus = you have 28,80,000 shares. In 2005 company declared 1:1 bonus = you have 57,60,000 shares

In 2010 company declared 2:3 bonus=you have 96,00,000 shares.

Share price of Wipro is Rs 428.00 in July 2010

The value of 57,60,000 shares in 2010 – 406.60 Crores.

CONCLUSION

Declaring Bonus shares is a sign that companies are increasing their profitability. If you look back, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves . Shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. So keep an eye on bonus history when you decide to buy a stock-It may be a good indicator that the company is healthy.

You may like these posts:

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21 Responses to “Bonus shares – A positive sign.”

Karthik Reddy Chintaparthi

May 31, 2011 at 3:32 pm

Can you please share the list of all the companies that issued bonus shares for 2010 – 2011 ?

Karthik

abhay raja

June 4, 2011 at 8:31 am

Send your e-mail id i’ll send you list of all companies that issued bonus shares for 2010-2011

Silky Janglani

August 2, 2011 at 2:20 pm

dear all

can i too share the list of all those companies that issued bonus shares for 2010-2011.

Anonymous

August 3, 2011 at 6:56 pm

Thank you, I have recently been looking for facts about this question for a while and yours is the best I have found so far.

B.K. Revankar

August 6, 2011 at 8:20 am

All the doubts regarding bonus issues are cleared.

Kumar

September 15, 2011 at 6:38 am

Can anybody enlighten me know the Companies declaring Bonus shares in the ensuing months including this month. Kumar.

Roshni Bhatia

February 19, 2012 at 1:58 pm

Very good explanation on bonus share, its impact on market price as well as implications for investors. Thanks for sharing.

ashfaq

April 16, 2012 at 3:24 pm

plz forward me company list of bonus issue in 2010-11

Romaisa Pasha

April 16, 2012 at 8:55 pm

very thorough explanation !! good work

Nilesh

April 17, 2012 at 6:08 pm

its always been seen that after the Ex Bonus date the market value of the stock always goes down. like in case of Sundaram Multi PAP. Its market value before exdate was Rs. 46, whereas on ex date it came down drastically to Rs. 15. Does it always happen. does exchange correct the value after Ex date. if so, how should we determine the price after ex date and whether we will get the better returns after bonus. and in how many days after the Ex bonus date does these shares gets credited to your account. Please email me if you can.

Thanks

Nilesh

Manoj Kumar Gupta

July 6, 2012 at 8:37 pm

Can you tell me the date of GSFC split of shares date.

Najmuddin

August 23, 2012 at 12:02 pm

Hi,

Nice post. My question is “why would a company issue bonus share when instead it could use the reserves to pay off debt (and hence reduce the finance costs)? . Is there something fishy here?”

thx

J Victor

August 26, 2012 at 8:13 pm

Sure . Accumulated reserves can also be utilized to decrease finance costs, if the company feels that the costs are high. Now, it’s for the management to decide whether they would like to go for an expansion or pay off debts or issue bonus shares or pay dividends.

Balaji

February 21, 2013 at 2:27 pm

I hold shares of a certain blue chip company which I intend to sell.But I can wait if they would be issuing bonus shares,which they have done in the past. Looking at the balance sheet or any other indication, would I be able to predict whether they would be issuing bonus shares this year ?

J Victor

February 25, 2013 at 7:58 am

definitely. you can make reasonable judgements looking at the balance sheet and past bonus history. However, declaring bonus shares is not a must.

Jatin

July 19, 2013 at 5:11 pm

Hey Vicor, must say really nice article
I had a question for you how can you come to know about STOCK SPLIT HISTORY of a particular stock???

From where did you get this stock split data for wipro??? Which website?
Thanks for answering :)

svanaja1952

July 26, 2013 at 9:21 am

Thanks a lot for this lucid description on bonus shares ! It helps dispel many myths on the topic in the minds of novice investors like me ! I wish your website all the best !

dr.d.r.makwana

December 17, 2014 at 11:18 am

Everyone of long term investors must be informed
about this glorious information.

sudarsana krishnan

September 13, 2015 at 10:13 am

All the explanations are very much useful and easy to understand. Thank you very much for the author who exposed their knowledge.

Peratchi Selvam

August 7, 2016 at 1:19 am

Your tutorial is very easy to understand. Thank you so much.
Can you please give me the list of companies that have issued bonus shares in the Year 2015-2016? My email: peratchi1112@gmail.com

ngkadam

September 10, 2016 at 1:13 am

Benefit of Long term investment like wipro. Can u give any tips for the same.

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