BONUS ISSUE: AN ILLUSION

What are bonus shares?

Bonus, a word, normally heard on day to day basis, such as Dashain bonus for employees, bonus on online cash transaction etc. and those to shareholders are well-known among investors on stock market. Let us know what exactly bonus shares are. These are fully paid up equity shares given to existing equity share holders without consideration. Let us make it easier: bonus shares are given to the current shareholders without taking any monetary benefits from those shareholders.

How is price adjusted after bonus issue?

If a company declares bonus shares to the shareholders, every shareholders cheers up because they think they have got shares for free. But in actual there is no profit for the shareholders from the bonus issue. Let us take an example, if a company declares 100% bonus shares. It means the company is willing to give another share for free for 1 held. After the bonus issue the market price of every company is adjusted as,

                                     Adjusted price = Market Price/ (1+ bonus share Percentage)

Suppose, market price of XYZ ltd. is Rs. 200 each and its proposing 100% bonus shares, then market price after adjustment will be Rs. 100. If Mr. ABC is holding 10 shares of Rs. 200 each of XYZ ltd. before bonus issue, He will get 20 shares of 100 each which will amount Rs. 2000 before and after bonus share issue.

Will my share to company increase after bonus issue?

Issue of bonus shares will cover all the share holders. So, bonus issue will increase every share holders share in proportionate basis. Total size of equity share capital is enlarged by those bonus issues by converting reserves into equity share capital.

What will be our concern?

We can conclude that our decision for investment in share market should be properly taken by absorption of knowledge about bonus shares and their mechanism.

Writer details:

Name: Gopal Singh Ayer

Email address: kroshyk@gmail.com

Phone number: 9843772288