How to Identify Companies That May Issue Bonus Shares

Investing in the stock market comes with the potential for various rewards, and one of these is the possibility of receiving bonus shares. Bonus shares are additional shares given to existing shareholders at no extra cost, usually in proportion to their current holdings. Bonus shares are often perceived as a signal of a company’s confidence in its growth prospects. However, identifying companies that may issue bonus shares requires a good understanding of the company’s financial health, past practices, and market conditions. In this blog, we discuss how to identify companies that may issue bonus shares.

What Are Bonus Shares?

The issuance of bonus shares is a corporate action that directly impacts shareholders. Bonus shares are additional shares issued by a company to its existing shareholders at no extra cost, usually in proportion to their current holdings. For example, in a 1:1 bonus issue, shareholders receive one additional share for every share they own, increasing their total shareholding. By increasing the number of shares, bonus issues can make the stock more affordable and improve trading liquidity.

What Are the Benefits of Bonus Shares?

Here are the key benefits of bonus shares:

• Increased Equity Ownership: Shareholders receive more shares, increasing their ownership in the company without additional investment.
• Enhanced Liquidity: With more shares in circulation, the liquidity of the stock generally improves, making it easier for shareholders to buy and sell shares.
• Positive Market Perception: Issuing bonus shares can be seen as a positive signal, suggesting that the company is confident in its future prospects.
• Capitalisation of Reserves: Bonus shares allow the company to convert its reserves into capital, which can be a healthy sign of the company’s financial strength.

How to Identify Companies That May Issue Bonus Shares

Analyse the Company’s Financials

The first step in identifying companies that may issue bonus shares is to look at their financial health. Companies that issue bonus shares usually have robust financials, including:

• Strong Reserves and Surplus: Companies with substantial reserves and surplus funds are more likely to issue bonus shares. This is because issuing bonus shares involves capitalising a part of these reserves. Look for companies with growing reserves in their balance sheets over the past few years.
• Low Debt Levels: Companies with low debt levels are also prime candidates for issuing bonus shares. Low debt indicates a strong balance sheet, allowing the company to reward shareholders without the need to conserve cash for debt repayment.

Monitor Company Announcements and Management Commentary

Keep an eye on company announcements, particularly those made during quarterly or annual results. Management often hints at their future plans, including potential bonus share issues. Here’s what to look for:

• Positive Outlook from Management: If management expresses optimism about future growth, it could signal an impending bonus issue. Companies may issue bonus shares to align the share price with future growth expectations.
• Capital Restructuring Plans: Companies that announce capital restructuring plans, such as stock splits or bonus issues, often do so to improve liquidity or make their shares more attractive to investors.
• General Meetings and AGMs: Important decisions like bonus share issuance are often discussed during Annual General Meetings (AGMs) or Extraordinary General Meetings (EGMs). Review the agendas of these meetings for any mention of bonus shares.

Study Market Sentiment and Stock Performance

Market sentiment and stock performance can also provide clues about potential bonus share issues. A significant and sustained rise in a company’s stock price can make the shares too expensive for retail investors. Companies may issue bonus shares to lower the stock price, making it more affordable and increasing liquidity.

Check Regulatory Filings

Companies are required to make regulatory filings that include financial statements and other important disclosures. These filings often provide hints about the company’s plans for bonus share issues.

• Annual Reports: Review the company’s annual report, particularly the section on financial statements and management discussion and analysis (MD&A). The report may provide insights into the company’s capital allocation plans, including potential bonus issues.
• Regulatory Announcements: Keep an eye on announcements made to the stock exchanges, as these often include resolutions passed by the board of directors regarding bonus share issues.

Conclusion

The decision to issue bonus shares is a corporate action, and the company duly informs the shareholders and the general public. Investors can always check the web pages of stock exchanges like NSE and BSE to find out about corporate actions like the issuance of bonus shares. Besides, the broker informs investors of bonus issues and other important information, generally through their demat account profile. On the Share India platform, which aims to provide a robust automated trading platform, investors can effectively track the impact of corporate actions like bonus shares in their portfolios.