As investors or potential investors in the equity market, you may have heard the term ‘bonus issue’ of shares. A bonus issue occurs when a company listed on a stock exchange decides to offer free additional shares to the existing shareholders.
A company’s board of directors discusses and finalises the number of shares to be allocated to shareholders. For example, if a company decides to do a bonus issue, it will decide and finalise an allotment number, like every shareholder will get one bonus share on every two shares held in the listed entity.
The company decides the number of bonus shares to be allotted to every individual investor for holding a certain number of shares over a set period of time and accordingly rewards them. This bonus issue aims to attract further investment and reward its existing shareholders as it improves the entity’s market image.
A bonus issue of shares will increase a company’s share capital but not its market capitalisation. Market capitalisation is calculated by multiplying the company’s current stock price and the total number of outstanding shares. Share capital is the amount that the company raises by issuing shares.
A bonus share issue is funded by the company’s healthy profits reflected in its annual or quarterly results, or from its share reserves. This type of share issue draws investors, making the company look more attractive to retail investors. However, this issue of bonus shares also has a downside, as the company could have used the funds required for this bonus issue in the business. So, this is sometimes perceived as an opportunity cost for the company and its shareholders.
If you are an investor receiving a bonus issue, you will still be liable to pay capital gains tax on selling the assets, including the bonus share. On the company’s end, the issue of bonus shares is not taxable.
RIL’s bonus issue
Reliance Industries Limited, at its 47th annual general meeting (AGM) held on Thursday, August 29, announced that its Board will meet on September 5 to decide about the bonus issue.
The oil-to-telecom conglomerate is India’s largest company in terms of market capitalisation. Chairman and Managing Director Mukesh Ambani announced that the company is considering a bonus issue at a ratio of 1:1. Further details will be disclosed by the company in the coming days.
“Reliance Industries Limited has sent a notice to the stock exchanges that the Board of Directors will meet on September 5 to consider issuing bonus shares in the ratio of 1:1,” said Ambani at the meeting.
This means Reliance Industries’ shareholders will receive one bonus share for every share they hold for a specific period of time.