What is Bonus Share? Meaning, Benefits & How It Works

A bonus share is a free additional share that a company gives to its existing shareholders. Companies issue bonus shares instead of paying cash dividends when they have good profits but want to reinvest money into the business.

Ravi owns 2,000 shares of a company. The company decides to issue bonus shares in the ratio of 1:2, which means Ravi will receive 1 bonus share for every 2 shares he holds.

So, Ravi will receive 1,000 bonus shares as a reward for being a shareholder.
 

Understanding Record Date and Ex-Date for Bonus Shares

To receive bonus shares from a company, shareholders must own the shares before the ex-date. If someone buys the shares on or after the ex-date, they will not receive the bonus shares, as the ownership does not transfer in time.

India follows the T+2 rolling settlement system, which means the record date comes two working days after the ex-date. The record date is when the company finalises the list of shareholders eligible for the bonus issue.

Example: Riya's Eligibility for Bonus Shares

Riya planned to receive bonus shares from a company that announced an ex-date of 15th July and a record date of 17th July. She purchased shares on 14th July, which meant the shares were credited to her demat account by the record date. 

Therefore, she was eligible to receive bonus shares. If Riya had bought the shares on 15th July (the ex-date), she would not have been eligible because the transfer of ownership would not have been completed in time.

Key Points to Remember
 

• Ex-Date: The last date to buy shares and remain eligible for bonus shares is one day before the ex-date.
   
• Record Date: This is the date on which the company checks its records to finalise eligible shareholders.
   
• T+2 Settlement: In India, shares are credited to the buyer’s demat account two working days after the trade.
   
• New ISIN: A new International Securities Identification Number (ISIN) is allotted for the bonus shares.
   

Advantages of Bonus Shares
 

Disadvantages of Bonus Shares
 

Types of Bonus Shares: Fully Paid and Partly Paid Explained

Companies may issue two types of bonus shares to their shareholders based on their capital structure: fully paid bonus shares and partly paid bonus shares. Let’s understand both with simple explanations and an example.

1. Fully Paid Bonus Shares

These are bonus shares that a company gives free of cost to its existing shareholders. The shares are fully paid, which means the investor does not need to pay anything for them.

Companies usually issue fully paid bonus shares in proportion to the investor’s current holdings. These shares come from specific reserves such as:

• Profit and loss account
   
• Capital reserves
   
• Capital redemption reserve
   
• Securities premium account

Example:
Amit holds 1,000 shares of a company. The company announces a 1:1 fully paid bonus issue. This means Amit will receive 1 bonus share for every 1 share he owns, so he will get 1,000 bonus shares completely free. His total shareholding will now be 2,000 fully paid shares.

2. Partly Paid-Up Bonus Shares

To understand this type, let’s first look at partly paid shares. These are shares where the investor has paid only part of the total issue price, and the rest is due later in instalments when the company makes a call.

A partly-paid bonus share is issued when:

• The company uses its profits to make these partly paid shares fully paid.
   
• Shareholders don’t have to pay the remaining amount.
   
• This is done by capitalising on profits.
   
• Unlike fully paid bonus shares, the company cannot use the capital redemption reserve or securities premium account for this issue.

Example:
Rohit owns 500 partly paid shares, where he has paid only ₹5 out of a ₹10 share price. The company decides to issue a bonus that covers the remaining ₹5 from its profits. Rohit’s shares are now fully paid, and he does not need to pay the rest.

Importance of Bonus Shares in the Stock Market

Bonus shares play a key role in the stock market. They not only reward existing shareholders but also help companies improve their market image. 

Although the total investment value stays the same immediately after the issue, bonus shares bring long-term benefits for both investors and companies.

Example: How Bonus Shares Help

Let’s say Neha holds 1,000 shares of XYZ Ltd. at ₹200 per share. The company issues a 1:1 bonus, giving her 1,000 extra shares. The share price adjusts to ₹100, but Neha now holds 2,000 shares. Her total investment value remains ₹2,00,000, but her shareholding has doubled.

Key Benefits of Bonus Shares
 

• Bonus shares increase shareholding without any extra cost.
   

Before and After Bonus Share Issue