/dhanam-english/media/media_files/UQOUBw5KUiPkxemU6Y28.jpeg)
A bonus issue of shares by a company will attract more retail investors to the company.
As investors or potential investors in the equity market, you may have heard the term ‘bonus issue’ of shares. What is a bonus issue? A bonus issue occurs when a company listed on a stock exchange decides to offer free additional shares to the existing shareholders.
The company's board of decides on the number of shares to be allocated to shareholders. It will decide on the quantum of allotment; for example, it will decide that every shareholder will get one bonus share on every two shares held in the 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 period 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.
RIL considering 1:1 bonus
Reliance Industries Limited, at its 47th annual general meeting (AGM) held on Thursday, announced that its board will meet on September 5 to decide the bonus issue.
RIL is India's largest company in terms of market capitalisation. RIL Chairman 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. This means RIL's shareholders will receive one bonus share for every share they hold for a specific time.
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 capital that a company raises by issuing shares.
An opportunity cost
A bonus share issue is funded by the company's 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. As for the company, the issue of bonus shares is not taxable.
(By arrangement with livemint.com)
