What are bonus shares? Why has GAIL issued them?
GAIL India Limited recently declared a reward for their loyal equity investors : a bonus issue in the ratio of 1:2. This means that investors will get 1 bonus share for every 2 shares held by them as of August 2, 2022. With this, GAIL joins 73 other Indian companies that have declared bonus shares in 2022.
All about the GAIL bonus issue: Bonus shares will be issued in the ratio of 1:2 ie, one share for every fully paid 2 shares that are held by investors. The shares issued in the bonus issue will have a face value of Rs 10.
- This bonus issue will now have to be approved by shareholders in the company's Annual General Meeting on August 26. Once it is approved, bonus shares will be credited to the shareholder's demat account.
- August 2 is the date to be eligible for receiving bonus shares. This means that you need to hold shares of GAIL on this date in your demat account.
The rationale behind bonus shares: Say you hold 10 shares of Reliance Industries because it has been consistently making profits and has good reserves. Now if Reliance wants to give value to its investors, it can:
- Retain the profits in its reserves and use this money to expand the company further (and thus increase profits).
- It can distribute the profits by either giving dividends in cash to its shareholders.
- Ot it can distribute its profits by giving bonus shares, without having to spend cash.
So what exactly are bonus shares? Bonus shares are free shares that a company offers to its shareholders and investors to add value to its portfolio. Now, if you hold shares of the company by a certain date in your demat account, you are sure to receive this bonus!
To receive bonus shares, you need to hold shares by a certain set date called Record Date.
For eg: In the case of GAIL Ltd, the announcement date is July 27, 2022, and the record date is August 2, 2022. This means that you need to hold shares of GAIL Ltd before August 2, 2022.
But also note that in India, every stock market transaction takes a time period of T+2 days ie once the trade occurs, your shares are credited to your demat account within 2 days of the trade date. So, ideally, you should buy shares of GAIL by July 31, 2022, to have shares in your demat account by August 2, 2022.
Even if you buy shares on August 1 or August 2, with the hope of receiving bonus shares, you will not get it. Instead, the person who sold the shares to you will get the bonus shares since as per the company's records, the shares are still in the seller's demat Account.
But here's another thing: July 30 and 31, 2022 fall on Saturday and Sunday respectively, and as you know, the stock market is closed on the weekend. Thus, in this particular case, you will need to buy your shares by July 29 itself.
Why do companies issue bonus shares? It is a very good tool for the company to make its shareholders happy, since they just have to move their cash from their reserves to their share capital and don't need to distribute any to the shareholders.
- Bonus issue usually generates a positive sentiment among shareholders since issuing bonus shares is an indication that the company is distributing profits, just like when it declares dividends.
- Also, once a company issues bonus shares, its share price drops, thus making the shares more affordable to a larger set of investors.
How is it different from stock split? In a stock split, one share splits into multiple shares, whereas, in a bonus issue, the company has to provide additional shares if you own even one share.
How will your wealth change? So, say if you had 10 shares of GAIL before August 2, and the market price was Rs 145 per share. When a bonus of 1:2 is issued, the price is expected to fall in the same ratio to say Rs 96. (145/3*2)
Pre bonus: Before the bonus, your portfolio value was Rs 1,450 ie 10 shares* Rs 145 = Rs 1,450.
Post Bonus: Once you receive 5 shares as a bonus, your portfolio will stay the same at Rs 1,450, but the internal calculations will change to 15 shares* Rs 96 = Rs 1450.