Bonus Shares

Click to edit Master subtitle style

4/19/12

Ex-bonus The share is said to become to be exbonus when the potential purchaser is not entitled to receive the current bonus, the right to which remains with the seller. Cum-Bonus
4/19/12

The share is described as cum-bonus

No- Delivery period Once a company announces its book closure or a record date the Exchange sets up a No-Delivery period for that security. During this period trading is permitted in that security However, the trades are settled only after the no-delivery period is over. This is done to ensure that investor's entitlement for the 4/19/12

Bonus shares are issued to the existing shareholders without payment of any consideration, either in cash or kind. Bonus shares are issued by conversion of the reserves and surplus of the company into shares. Bonus shares can be issued only by companies which have accumulated large free reserves.
4/19/12

Free Reserves are that is not set

Shares are issued by conversion of the reserves and surplus of the company into shares. These are accumulated large free reserves i.e. reserves not set apart for any specific purpose and which can be distributed as dividend. Also known as the capitalization issue, a company transfers profits to a fund called its capital redemption 4/19/12

Bonus equity is allotted exactly in proportion with the shareholders size of holding. For example, if bonus is declared in the ratio of 1:10, a shareholder owning 10 shares in the company will be allotted 1 equity as bonus. His ex-bonus holding then will
4/19/12

Then the question remains: why does a company declare bonus issue? Actually bonus issue is a device to pay back to its equity investors

4/19/12

Equity

shareholders

are

the

real

owners of the company. Thus they are entitled to the net distributable profit of the company. Dividend is a means to pay them back the surplus the company has created. But 100% of the divisible profit is generally not
4/19/12

As we know, a company has to pursue a dividend policy that maximizes the value of the firm. So the decision regarding dividend payment and its quantum is done with an eye to value maximization. Too liberal dividend payment may not result always in value maximization. For a firm earning at a rate more than the market retaining more of 4/19/12 the profit would help in increasing

Points in favour of bonus: Bonus does not attract tax to the shareholders like the cash dividend received; A shareholder has always an option to sell a portion additional shares to access cash if he needs to; The shareholders are likely to receive higher cash dividends on increased 4/19/12 investment base in the years to

A successful bonus issue would also improve the capital market prospects for the company making it easier for it to raise finance in immediate future;

For a company whose shares are too

4/19/12

highly

quoted

in

the

market

Ideally speaking, since there would be a fall in the price in ex-bonus situation, shareholders are not likely to gain. Bonus issue increases the number of shares outstanding. So the EPS gets diluted. The demand side remaining the same, the market value of the shareholding would not change. For example, if a company has an equity capital base of 100000 4/19/12 shares, in case of an 1:10 bonus, the

But in reality bonus issue is a proven track to shareholders value maximization. It is true that there is a risk of the price falling down. But in reality this could be otherwise. As we have already discussed that bonus issue has a positive impact on the market, there is also a strong possibility of newer demand created in the market. Those who could not 4/19/12 find the chance to buy the shares of

Moreover, with an initial falling price, they may feel encouraged to buy the companys scrip. Particularly, more reputed the company is, stronger would be such possibility. This
4/19/12

pressure of demand would also arrest

However, much of the success of a bonus issue depends on its timing and the bonus ratio the management decide. The cases of mistiming and wrong bonus ratio are not very uncommon in the corporate world. In the recent past companies like Ponds (India) Ltd. and Tata Tea Ltd. have suffered on this count. Bonus issue have failed to create the desired 4/19/12 response that has pulled the price

Thanks

4/19/12