IEX Jumps 20% Bonus Share Announcement: Understanding How the Bonus Issue Works

Earlier today, the Indian Energy Exchange (IEX) informed the stock exchanges that the company’s board will meet on October 21 to consider the bonus issue of equity shares. Following the announcement, the company’s stock soared as much as 20 percent to hit its 52-week high. ₹956.15.

“We would like to inform you that the Board of Directors of the Company in its meeting to be held on Thursday, October 21, 2021 will also consider, inter alia, a proposal to announce the issuance of bonus of equity shares, subject to the approval of the shareholders. of the company,” the exchange informed in a BSE filing today.

When a firm issues bonus shares, its shareholders do not incur any additional costs for receiving them. The number of bonus shares you will receive depends on the number of shares in the firm that you already hold.

Then why does a company issue these free, additional shares?

This is mostly done to increase the liquidity of the stock. When the price of a stock is high, many retail investors may find it difficult to buy that stock. By issuing bonus shares, the total number of shares of the firm increases, thus reducing its stock price and making it accessible to more investors. With more shares at a lower price in the market, the liquidity and investor engagement of the shares improves significantly.

At times, companies also issue bonus shares when they do not have enough cash to pay dividends to the shareholders despite the profits. It is also done by some firms to avoid paying higher dividend distribution tax. In lieu of dividend, which is paid regularly, it issues additional shares to its investors in the form of bonus.

So how does it work?

The company issues these shares in a particular ratio. Suppose a 1:1 bonus issue is announced. This means that each person who owns the shares will get an additional share. Let’s say you have 20 shares in a firm and it issues 1:1 bonus shares, then you will get 20 additional shares in your demat account.

Similarly, suppose a firm has declared bonus shares of 4:1, then for every 1 share, the shareholder will receive 4 more. So if you have 20 shares, you will get 4*20 which is 80 additional shares.

Who is eligible?

All the shareholders who hold shares of the firm before the ex-date fixed by the firm are eligible for bonus shares.

The company also notifies the shareholders about a record date while announcing the bonus issue. This is the cut-off date set by the company.

India follows a T+2 rolling system, which means the ex-date is 2 days before the record date. An investor, if he wants to be eligible for the bonus issue, should buy the shares before the ex-date. Anyone who buys the stock on the ex-date will not be eligible.

The bonus shares are then credited to the shareholders’ accounts within fifteen days after a new ISIN (International Securities Identification Number) is assigned.

Bonus issue and share price

Suppose the share price is ₹200 and total shares are 100 before bonus issue. The bonus ratio declared by the firm is 1:1 (i.e. bonus 1 share for every 1 share). Now after the bonus issue the number of shares will be doubled, which is 200.

So now if the share price of the company before the bonus issue was ₹200, it will decrease as the number of shares increases.

New Share Price = Stock Price * Old Share / New Share = 200*100/200 = 100.

Hence the share price got halved after the bonus issue. However, the issuance of a bonus does not reduce the value of the investment to any shareholder. If you had 2 shares before the bonus issue, that means the investment was worth ₹400 (Share Value * Shares Held).

After the bonus issue, you have 4 shares. Regardless of your share price. have decreased from ₹200 to ₹100, the number of shares also increased from 2 to 4. The value of your investment remains the same after the bonus issue ₹400.

Companies usually issue bonus shares to increase retail participation and increase liquidity of the stock. While this brings down share prices, it is a great opportunity for investors to accumulate shares.