A bonus share is an additional share of a company's stock given to its existing shareholders at no extra cost. They are typically issued out of the company’s accumulated earnings. This mechanism is an efficient way of distributing a company's profits to its shareholders in the form of additional shares rather than cash dividends.
Defining Bonus Shares
Bonus shares are defined under Section 63 of the Companies Act, 2013, which states that a company may issue fully paid-up bonus shares to its members out of its free reserves, securities premium account, or the capital redemption reserve account. No issue of bonus shares can be made by capitalising reserves created by the revaluation of assets.
SEBI Guidelines on Bonus Shares
The Securities and Exchange Board of India (SEBI), the regulator for the securities market in India, prescribes certain norms for issuing bonus shares under its Issue of Capital and Disclosure Requirements Regulations, 2018. According to the regulations, a listed entity shall not make a bonus issue if it has defaulted in payment of interest or principal on fixed deposit or debt securities issued by it or in respect of the payment of statutory dues relating to its employees.
The listed entity can issue bonus shares if it has resolved any such default mentioned above. Also, it is obligatory for the listed entity to make the reservation for bonus shares for the holders of fully convertible debentures or partly convertible debentures, in case these debenture holders have the option to convert their debentures during the period when bonus issues are announced.
Key Principles Governing the Issue of Bonus Shares
Conservation of Cash: Bonus shares do not impact a company’s cash reserves. They essentially capitalize a part of the company’s retained earnings and distribute it to shareholders in the form of additional shares.
Income Tax Implications: In India, bonus shares do not invite tax liability at the time of issue as they are issued at no cost to the shareholders. However, if the shareholder sells these bonus shares at a later date, capital gains tax may apply.
Impacts on Share Prices: Bonus issues often lead to a reduction in the market price of the share after the issue, as the number of shares increases while the company's equity remains the same. However, it is also seen as a positive sign of the company's financial health and future prospects.
Examples of Bonus Share Issues
Reliance Industries Limited: In 2017, Reliance Industries Limited declared a 1:1 bonus issue. This meant that shareholders received one bonus share for every share held by them.
Tata Consultancy Services: In 2018, TCS also declared a 1:1 bonus issue. This was the company’s second bonus issue in three years.
Conclusion: The Significance of Bonus Shares
Bonus shares serve as a significant tool for companies to reward their shareholders by offering them additional shares without depleting the company’s cash reserves. However, these need to be issued in compliance with the rules and regulations stipulated by SEBI and the Companies Act, 2013 to ensure transparency and fairness to all stakeholders involved.