2016 – Bonus-o-mania:

Corporate benefits are one of the main attraction for investing in stocks / shares. There are a number of ways corporate benefits are bestowed upon the share holders : in the form of dividends / rights issue and bonus shares. Among then, Bonus shares excites the investors the most - Investors / share holders get free shares! 

Though investors feel psychologically happy since they get something free, there is a deeper logic behind the concept of Bonus  : exponential growth in number of shares being allotted.

For instance if you had bought 100 shares of a company, and if this company declares 1:1 bonus once in 3 years, then by 15 years you would have got 5 bonuses and the number of shares would have ‘multiplied’ to 3200 shares. (100:100, 200:200, 400:400, 800:800, 1600:1600 = 3200). That's exponential growth!

Bonus shares are allotted only to existing share holders in a prefixed ratio, say 1:1 or 1:2 etc. And even those who have not invested in the shares, if they buy it before the ‘cut off’ or ‘record date’, then such share holders are also entitled to receive the bonus shares.

Bonus shares are usually declared occasionally. But in current year (2016), it seems to be a frequent phenomenon. Good companies like Berger paints (2:5), Hatsun Agro (2:5), BPCL (1:1), ITC (1:2), Tide water (1:1), Mind tree (1:1) have declared bonuses. And the latest one to join the bandwagon is HPCL which has declared bonus in the ratio of 2 share for every one share held (2:1).

For every event to happen, a trigger is required. The same is true with Bonus shares too:

• The trigger behind the series of bonus announcements seems to be the decision of the government to tax dividends. Yes. Those investors who receive dividends of more than 10 Lakhs from a single company will have to pay a dividend tax of 10%.
• Obviously these BIG are often taken by BIG investors (primarily promoters themselves).
• Probably ‘they’ decided, why declare dividend and pay tax. Better allot bonus shares and hold it. In the first place, you don't pay dividend tax. And secondly, you need not reinvest the funds - it is already reinvested in the form of bonus shares.

By allotting bonus shares,

• In the first place, you don't pay dividend tax.
• There is no tax on allotment of bonus shares.
• Investors need not search for avenues to reinvest the funds - it is already reinvested in the form of bonus shares.
• Bonus shares sold after being held for an year becomes eligible for long term capital gains which is tax free.
• And investors who want funds / similar to dividends have the flexibility of selling their existing holdings / long term holding and enjoy them tax free.

Hence don’t be surprised if more and more companies declare bonus shares. They are part of prudent tax planning. Without questioning much, choose the right company, invest in it and enjoy the bonus-o-mania.