What is a Bonus Issue?

More Shares, Same Price? Decoding Bonus Issues

In the journey of investing, there are moments when a company goes above and beyond to reward its shareholders. Imagine a company surprising you with a gift – not just any gift, but more shares in the company itself! That's the magic of a bonus issue, a strategic move that rewards loyal shareholders and fuels future growth. This act of generosity reflects the company's confidence in its future and its commitment to rewarding loyal shareholders.

In this chapter, we’ll explore what bonus issues are, how they benefit shareholders, and provide real-world examples from the Indian market. Building on our understanding of corporate actions and dividends, bonus issues represent another strategic move companies use to reward and engage their investors.

Understanding Bonus Issues

A bonus issue, also known as a scrip issue or capitalization issue, involves a company issuing additional shares to its existing shareholders without any extra cost. These shares are distributed in a predetermined ratio, such as 1:1 or 2:1, meaning shareholders receive additional shares based on the number of shares they already hold. Think of it like this:

Suppose you own 100 shares of a company, and the company declares a bonus issue in the ratio of 1:1 (meaning you get one bonus share for every share you hold); you'll receive an additional 100 shares for free. This increases your total holding to 200 shares.

Why Do Companies Issue Bonus Shares?

Companies don't just hand out free shares for no reason. Here are some key motivations:

1) Rewarding Shareholders: Bonus issues are a way to say "thank you" to investors for their continued support and belief in the company's future. It's a token of appreciation for their loyalty.

2) Enhancing Liquidity: By increasing the number of shares in the market, bonus issues can enhance the liquidity of the stock. This means it's easier for investors to buy and sell shares, which can attract new investors and improve overall market sentiment.

3) Sign of Confidence: Issuing bonus shares often reflects the company’s confidence in its future growth and profitability. It suggests that the company has strong reserves and is optimistic about growth.

4) Psychological Impact: A higher number of shares at a lower price can make the stock more attractive to small investors. This can lead to increased demand and a positive impact on the stock price.

Let's see some real-world examples of companies in India that have utilized bonus issues:

• HDFC Bank: In 2019, they announced a 1:1 bonus issue, rewarding shareholders and showcasing their robust financial position.
• Reliance Industries: A bonus issue veteran, Reliance Industries has issued bonus shares multiple times, like in 2017 when they doubled the number of shares held by each shareholder. This action signalled their strong performance and future potential.
• Infosys: This IT giant has also utilized bonus issues, like in 2018, to reward shareholders and enhance the liquidity of their shares.

How Bonus Issues Impact Shareholders?

Bonus issues have several impacts on shareholders:

1) Increased Shareholding: Shareholders receive additional shares, increasing their total stake in the company without any additional investment.

2) Market Perception: A well-received bonus issue can lead to increased investor interest and higher stock demand.

3) No Immediate Financial Gain: Unlike dividends, bonus shares do not provide immediate financial gains. However, they increase the number of shares held, leading to higher future returns if the company continues to perform well.

4) Share Price Adjustment: The share price is typically adjusted downwards proportionally to the bonus issue ratio to reflect the increased number of shares. For example, if a company’s stock is trading at INR 1000 and announces a 1:1 bonus issue, the share price may adjust to INR 500 after the issue.

Case Study: Infosys - A Bonus Issue Success Story

Infosys, a leading IT services company, has issued bonus shares multiple times. In 2018, Infosys announced a 1:1 bonus issue, doubling the number of shares held by its shareholders. This bonus issue was part of Infosys’s strategy to reward its shareholders and enhance liquidity. The move was well-received by the market, reinforcing investor confidence in the company’s future growth prospects.

Conclusion

Bonus issues are an effective way for companies to reward their shareholders and signal confidence in their financial health. By increasing the number of shares each shareholder holds, bonus issues enhance liquidity and can positively influence market sentiment. Understanding bonus issues, along with other corporate actions like dividends, helps investors make informed decisions and maximize their returns.

In the next chapter, we'll explore another crucial corporate action: rights issues. We'll uncover rights issues, how they work, and how they impact shareholders. Stay tuned for this insightful exploration!