Demat accounts and various types of Demat accounts have become one of the most important accounts for investing, as the Securities and Exchange Board of India (SEBI) has made holding securities digitally mandatory. However, imagine if you get free shares in your Demat account without having to pay for them.
This is where the concept of bonus shares comes into the picture. It is a type of share that provides shareholders with extra shares free of cost. But what do the shareholders have to do if a company announces bonus shares? When will bonus shares be credited to the Demat account?
This article will help answer all these questions along with the advantages and disadvantages of a bonus issue.
What is a bonus share issue?
When companies launch their IPO to list their shares on various stock exchanges, investors who buy these shares become shareholders. Companies regularly try to provide better returns to these shareholders by ensuring an increase in the stock price or by offering dividends. However, a company pays dividends when it earns profits to reward shareholders for holding the company shares.
Now, whenever a company makes profits, shareholders expect the company to reward them with dividends. Sometimes, when the company wants to use all profits for business purposes, it announces bonus shares.
Bonus shares are extra shares that a company offers to current shareholders without asking for any payment (buying cost) in return. The additional number of shares is given as a ‘bonus’ if the company does not provide a dividend even after earning good profits.
Companies issue bonus shares by announcing a ratio. For example, if a company has issued bonus shares in the ratio of 3:1 and you hold 3,000 shares of the company, you will receive an additional 1,000 shares free of cost.
When bonus shares are credited to the Demat account?
Once the company announces the bonus issue, the next step is to have the bonus shares credited to Demat accounts. The answer to the question of when will bonus shares be credited to the Demat account is explained below:
When companies first announce bonus shares, they specify the bonus ratio (3:1, as in the above example), along with the record date and the ex-date. The record date is the date on which the company records the names of all current shareholders and defines them as eligible for bonus shares. An investor must have company shares on the record date to be eligible for the bonus issue.
The ex-date is the date one day before the record date, which results in the share price adjusting itself to the share bonus issue. For example, if a company’s share price is trading at Rs. 500, and the company has announced a 1:1 bonus issue, the shares will adjust and fall to Rs. 250.
The next step is bonus share credit to Demat accounts based on the allotment date. On this date, the shares start reflecting in your Demat accounts, and you will see an increased number of shares in your holdings. Afterwards, on the listing day, which is a few days after the record date, the shares are listed on the stock exchanges for further trading.
Pros of bonus shares credited to Demat accounts
Here are some of the benefits when bonus shares are credited to a Demat account:
- When a company announces bonus shares, the shares adjust to the bonus issue ratio on the ex-date, reducing the share price and increasing the number of shares. The lower price makes the shares affordable and attractive for new investors.
- As bonus shares provide an additional number of shares free of cost, it increases a shareholder’s stake in the overall company. If the company does better in the future, the shares can provide better returns to the shareholders.
- Bonus shares result in a higher share float as more shares are available for investors to trade. This increases the trading volume and liquidity as more investors buy and sell the shares.
- Bonus shares do not reduce a shareholder's overall holdings value. Although the share price reduces and adjusts on the ex-date, the additional number of shares brings the overall value to the same amount before the bonus issue.
- Since the total holding value remains the same, the shareholders are not liable to pay any taxes or meet additional compliance.
Cons of bonus shares credited to Demat accounts
Here are some of the disadvantages when bonus shares are credited to the Demat account:
- Bonus shares are considered merely a book adjustment and do not provide immediate profits to the shareholders as the overall holding value remains the same.
- Bonus issues increase the share float, resulting in more shares available to buy and sell. This can reduce the company’s book value per share (BVPS) and earnings per share (EPS).
- Once a company issues bonus shares, shareholders may expect a bonus issue every time the company doesn’t announce dividends.
- For experienced and knowledgeable investors, a bonus issue may seem a negative factor as it creates no external value for the shareholders in terms of monetary gains.
Conclusion
When talking about what are shares, bonus shares are a way for companies to reward shareholders if they cannot pay dividends. It provides additional shares to the shareholders without them having to pay any extra amount. However, as the share price also reduces based on the bonus issue ratio, it doesn’t essentially result in providing any immediate monetary benefits to the shareholders. However, based on the company’s future financial performance, the share price may increase and provide better returns after bonus shares are credited to the Demat account.
