What is a bonus share, why do companies issue them; what is the benefit for investors
Mukesh Ambani-owned Reliance Industries (RIL) and government construction company NBCC are soon going to issue bonus shares for their investors. Reliance will issue bonus shares in the ratio of 1:1 and NBCC 1:2. This means that existing shareholders of Reliance will get 1 share free for every 1 share. At the same time, NBCC investors will get one share free for every two shares.
Let’s understand why companies issue bonus shares. What benefit do they get from this? Also, are bonus shares beneficial for shareholders?
What is a bonus share?
As the name suggests, bonus shares mean getting shares for free. It is technically free, but it does not mean that the value of your investment will also double along with your shares. Let us understand this with the example of Reliance Industries. Reliance is going to issue bonus in the ratio of 1:1.
If you have bought 5 shares of Reliance at the price of Rs 3,000. This means that your total investment is Rs 15,000. After the bonus issue, the value of your investment will remain Rs 15,000, but the shares will double to 10. Then the price of one share will be Rs 1,500.
Why do companies issue bonus shares?
There are many reasons for issuing bonus shares. Many times companies issue bonus shares to increase liquidity in their shares. Issuing bonus shares reduces the price of the stock and it becomes easier for common investors to buy them. Now talking about Reliance, the price of one of its shares is currently around Rs 3000, which will come down to Rs 1,500 after the bonus shares are issued. After this, you will be able to buy more Reliance shares.
These shares are given to existing shareholders on the basis of their current stake in the company. Issuing bonus shares to existing shareholders is also called Capitalization of profits as it is given from the profits of the company.
What are the benefits of bonus shares to investors?
Bonus shares do not give any immediate benefit to investors. It is a profitable deal for the long term. Bonus shares increase the trust of investors in the company. Also, they get dividends when the price of shares increases. If the company declares dividends in the future, the investor will receive more dividends as he will now have a larger number of shares in the company due to bonus shares.
Read More: Hyundai Motor India Set to Launch ₹25,000 Crore IPO on October 14
