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Impact of bonus issue
of shares with case
What is a Bonus Issue?
A bonus issue, also known as a scrip issue or a capitalization
issue, is an offer of free additional shares to existing
shareholders. A company may decide to distribute further
shares as an alternative to increasing the dividend payout.
For example, a company may give one bonus share for every
five shares held.
CONDITIONS FOR ISSUE OF BONUS
The issue of bonus shares must be authorized by the
Articles of the company.
The issue of bonus shares must be recommended by the
resolution of the Board of Directors. Also this
recommendation must be later approved by the
shareholders of the company in the general meeting. The
Controller of Capital Issues must give permission to the
The above mentioned are the conditions that a
company must fulfil to issue bonus shares.
bonus shares are issued for meeting the liquidity needs.
When there are situations where the company is running
out of cash, and shareholders are expecting their regular
dividends, then bonus issues are given to shareholders. By
selling these bonus shares, the shareholders can meet
their liquidity needs.
Restructuring the company's reserves is another reason
why bonus shares are issued. But there is a system on
how bonus issues take place.
What are the Reasons for
HOW WE CAN GET BONUS
To be eligible for the different types of bonus shares you must
hold the shares of the company in the demat account. If you
want to open a demat account, you can consider Kotak
Securities. They are the leading broking firm of India that
provides premium services to the clients at the most affordable
Companies low on cash may issue bonus
shares rather than cash dividends as a
method of providing income to
Because issuing bonus shares increases the
issued share capital of the company, the
company is perceived as being bigger than
it really is, making it more attractive to
In addition, increasing the number of
outstanding shares decreases the stock
price, making the stock more affordable for
However, issuing bonus shares takes
more money from the cash reserve than
issuing dividends does.
Also, because issuing bonus shares does
not generate cash for the company, it
could result in a decline in the dividends
per share in the future, which
shareholders may not view favourably.
In addition, shareholders selling bonus
shares to meet liquidity needs lowers
shareholders' percentage stake in the
company, giving them less control over
how the company is managed.
IMPACT OF BONUS ISSUE ON HOLDINGS
Impact on holdings
The share price falls in the ratio of the bonus allotment. However, this does not
affect the overall value of holdings.
Mr A holds 10 shares of Reliance at ₹1000 each and the company has announced
a bonus issue in the ratio of 2:1. So Mr A will receive 2 bonus shares of Reliance
for every share held on the record date.
Mr A’s holdings will now have 30 shares of Reliance after the bonus issue (10
originally bought + 20 bonus shares).
In the above example, the share price will drop to ₹333.33 [1000/(2+1)] but this
won’t change the value of Mr A’s holdings.
Value of holdings before bonus: 10 × 1000 = ₹10,000
Value of holdings after bonus: 30 × 333.33 = ₹10,000
If a company announces a 1:2 bonus and an investor holds just 1 share, they will
get 0.5 shares as a bonus. The 0.5 shares are known as partial bonus shares that
are settled in cash, and the funds will be credited to the investor's primary bank
CASE BRIEF -
Infosys (the Company or Infosys) is a leading provider of
consulting, technology, outsourcing and next-generation
digital services, enabling clients to execute strategies for
their digital transformation. Infosys strategic objective is
to build a sustainable organization that remains relevant
to the agenda of clients, while creating growth
opportunities for employees and generating profitable
returns for investors. Infosys strategy is to be a navigator
for our clients as they ideate, plan and execute on their
journey to a digital future.
Company is almost debt
Company has a good
return on equity (ROE)
track record: 3 Years
Company has been
maintaining a healthy
dividend payout of
• Stock is trading at 9.77
times its book value
• The company has
delivered a poor sales
growth of 9.98% over past
• Promoter holding is low:
Impact of bonus issue on infosys
As a result of bonus issue, the number of outstanding Infosys
shares will also double and its lot size in derivative market also
double. But, their holding (in terms of percentage) in the
company remains the same. Also, earnings per share (Earnings
Per Share = Net Profit / Number of Shares), falls as more share
are outstanding now. The face value of Infosys shares will remain
Rs 5 per share post the bonus issue. A bonus issue increases
the liquidity of shares in the market and results in increased
investor base. Bonus shares are issued from retained earnings,
as on 31st March 2015, Infosys's share capital was Rs 572
crore, after bonus issue it will be doubled and the similar amount
will be deducted from its retained earnings, which stood at Rs
54191 crore as on 31st March 2015.
liquidity needs - In simpler terms, liquidity is to get your money whenever
you need it.
Dividends - It refers to a reward, cash or otherwise, that a company gives to
ROE - Return on equity signifies how good the company is in generating
returns on the investment it received from its shareholders.
Announcement date - Date on which issue of bonus was announced .
The record date – it is a cut-off date set by the company and the investors
must be shareholders of the company before this date for them to be
eligible to receive bonus share issue.
The ex-date is the last day to buy the company's stock in order to be eligible for a
bonus share issue.
AGM – annual general meeting ,
EGM- extraordinary general meeting meeting other than agm )
A bonus issue is an offer of free additional shares to existing shareholders. A
company may decide to distribute shares as an alternative to increase the
There are two conditions which are essential for issue of bonus share. These
conditions must be fulfilled for issue of bonus share.
There is a procedure for bonus issue which consists of six steps.
There are mainly two reasons for issuing bonus issues
which are meeting the liquidity needs and
another reason is restructuring the company reserve.
as a coin has two side the same is with this concept of bonus issue it has both
advantages and disadvantages
to explain better all these, we have taken example or case study of Infosys to
explain better all these concepts and we have also shown some history and
impacts of bonus issue in Infosys.
In end we would like to thanks to all and specially Preeti Maam for giving us
this opportunity for presenting and learning of this topic.