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Share Market Guide: Bonus Share Issue

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Recently, RITES Ltd., a publicly listed government company in India announced its bonus issue. The issue had an ex date of 8th August, 2019. I participated in the bonus issue and received my bonus shares in my demat account on 23rd August, 2019. This post is based on my personal experience. Let us understand how bonus issues work through the example of RITES.

What is Bonus Issue?

Bonus share issue is a way for the company to pass on the profits to the shareholders. It involves giving free additional shares to the existing shareholders in proportion to their current holding. A bonus issue does not require much money from the side of the company. The company is only required to issue additional shares. Therefore, it is a better way of rewarding shareholders than paying dividends if the company is low on cash.

Bonus Ratio

This ratio determines the number of bonus shares that you will get based on the number of shares that you have. For example, in case of RITES, the Bonus Ratio was 1:4 (one-for-four) which means that a shareholders will get 1 fully paid up equity share for every 4 equity shares held by the shareholder. All the bonus shares have the same face value as the original shares. In simple words, fully paid-up shares of same face value means that the new shares are identical to the original shares and cannot be distinguished in any way.

Record Date

Since the shares are constantly traded in open market, in order to determine the number of shares held by each shareholder, a date is fixed. This is called record date. The bonus issue is calculated based on the number of shares that you hold on the record date. For example, RITES bonus issue had a record date of 11th August, 2019. But at what time exactly, would the holdings be recorded on the share market? That's where the "ex date" comes in.

Ex Date

This is the most important date in any bonus issue. As there is a possible time difference between the time the market holding is recorded on stock exchanges and the time it is reported to the company, the stock exchanges determine another date which is two to three working days before the actual record date. This makes it convenient for the stock exchanges to report the holdings at the record date given by the company. This date is called "ex date". The stock exchanges take a snapshot of the shareholding before the start of trading on this date and lock it for the record date. This means that whatever your shareholding is before the start of trading on ex date is your shareholding for the bonus issue. For example, ex date of 8th August, 2019 was setup for RITES bonus issue. This means that whatever the holdings were before the start of trading on 8th August would be reported to the company on the record date of 11th August, 2019.

Carefully examine the wording here. Before the start of trading on ex date means whatever was the shareholding at the close of one working day before the ex date. In this case, it means that whatever was the holding pattern at the end of working day on 7th August, 2019 would be considered for the bonus issue.

Another interesting thing is that even if you sell your shares on or after the ex date i.e. on or after 8th August, 2019 in this case, you will still receive the bonus shares because you had held the shares before the ex date when the holding was recorded by the stock exchanges.

Share Price Changes

The share price usually changes on ex date. This is because, the supply of shares in the market has increased without any cost to shareholders, therefore the value of shares decreases in the proportion of the bonus ratio. For example, here for the bonus ratio of 1:4, there will be a total of 5 shares if you initially hold 4 shares. That means the ratio of shares after to shares before is 5:4. So, price ratio after to price ratio before is 4:5 i.e. price on ex date is 4/5th the price before the ex date.

Remember the price changes on ex date to balance out a market condition but you do not get the bonus shared until the issue date

Issue date

This is the date on which you get the bonus shares deposited into your demat account. I received my bonus shares for RITES on 23rd August, 2019.

Update on 25th September, 2019:

Fractional Allocation Adjustment:

Often there is a fractional allocation of shares which cannot be deposited in demat account. Such fractional shares are automatically sold in the open market and the money is directly transferred to the bank account of the shareholder.

For example, let us say someone had 10 shares of RITES, according to the ratio, the person would be eligible to get 2.5 bonus shares, but one cannot hold fractional shares. In such a case, the person would get 2 bonus shares. The fractional allocation of all the shareholders would be combined and sold in the open market. All the shareholder would get money proportional to their fractional allocation. In this case, the person would get money equal to half the price of one share transferred into his/her bank account.
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