Bonus Shares In Nepal: Maximizing Shareholder value and Company growth

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Bonus shares are the additional shares a company gives its existing shareholders based on their shares. It is issued to the shareholders without any additional cost. Bonus share serves as a means for companies to reward shareholders and utilize retained earnings.

 Its issuances can contribute to increased market liquidity, improve market perception, and provide flexibility in the capital structure of companies. In Nepal, the Securities Board of Nepal (SEBON) regulates and oversees the issuance of bonus shares of the company.

 We further discuss types of bonus shares, how bonuses are calculated, features of bonus shares, advantages or disadvantages of it and how we can benefit from bonus shares in the Nepalese Share market. 

Types of Bonus Share:

Fully Paid Bonus Shares:

Fully paid bonus shares are issued to shareholders at no cost in proportion to their existing holdings in the company. Shareholders do not need additional payments to acquire these bonus shares. The company funds the issuance of fully paid bonus shares from various sources, including the profit/loss account, capital redemption, investment allowance reserve, or security premium account.

Partly Paid Bonus Shares:

Partly paid bonus shares refer to shares where the investor has made a partial payment towards the share price but still needs to fulfil their financial obligations by paying the remaining amount in instalments. These shares are initially purchased by paying only a portion of the share’s total price, and the investor must make subsequent payments to complete the transaction.

Calculation of Bonus Share:

Bonus shares are typically calculated based on a predetermined ratio determined by the company. The calculation involves determining the proportion of bonus shares to be issued concerning the existing shareholding of the shareholders.

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The formula for calculating bonus shares is as follows:

Bonus Shares = (Number of Existing Shares) x (Bonus Ratio)

The “Number of Existing Shares” refers to the total number of shares held by a shareholder before the bonus issue, and the “Bonus Ratio” represents the ratio specified by the company for the bonus share issuance.

if the bonus ratio is 2:1, the calculation would be:

Bonus Shares = 100 (Number of Existing Shares) x 2 (Bonus Ratio) = 200 bonus shares

The number of bonus shares each shareholder receives is proportional to their existing shareholding. It’s important to note that the company’s board of directors determines the bonus ratio and communicates it to the shareholders through official announcements.

You can calculate the bonus share by using the calculator.

Features of Bonus Shares

The following are some of the unique features of bonus share issuance.

  1. Bonus shares can only be issued after 12 months since the last share issuance and a maximum of two times within five years.
  2. Bonus shares increase a company’s liquidity by increasing the number of outstanding stocks.
  3. A fall in share prices encourages new investors to invest.
  4. Bonus shares are generally not subject to additional taxes.
  5. Issuing bonus shares does not impact a company’s net assets or cash flow.
  6. Bonus shares can enhance investor confidence and encourage future investments.
  7. Bonus shares balance fixed assets and shared capital in a company’s financial structure.

Key dates for the issuance of bonus shares

The key dates for issuing bonus shares vary for each company and are announced by the respective companies. Shareholders and investors should refer to the official announcements made by the company or consult with their stockbrokers to obtain accurate and up-to-date information regarding the specific dates related to the issuance of bonus shares. These dates typically include:

  1. Announcement Date: When the company officially decides to issue bonus shares. This announcement includes details such as the ratio of bonus shares, eligibility criteria, and record date.
  2. Record Date: The date determined by the company on which shareholders must be registered in the company’s books to become eligible for receiving bonus shares. Shareholders who hold shares on or before the record date are entitled to bonus shares.
  3. Ex-Bonus Date: The date on which the company shares start trading without the entitlement to the bonus shares. Investors who purchase shares after the ex-bonus date are not eligible for the bonus shares.
  4. Allotment Date: When the company completes the allotment process and issues the bonus shares to the eligible shareholders. On this date, the bonuses shares are credited to the shareholders’ demat accounts or physical share certificates are dispatched.
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Advantages and disadvantages of issuing Bonus shares:

Advantages:

  1. Enhanced Shareholder Value: Bonus shares increase the number of shares held by shareholders, thereby increasing their overall stake and potential returns.
  2. Increased Liquidity: Bonus shares improve market liquidity by increasing the number of shares available for trading.
  3. Positive Signal: Investors see Bonus shares as a positive signal, indicating the company’s financial strength and prospects.
  4. Retained Earnings Utilization: Bonus shares allow companies to distribute accumulated profits or reserves to shareholders without utilizing cash reserves.
  5. Cost-saving for Investors: Bonus shares are issued at no cost to shareholders, allowing them to benefit without incurring additional expenses.
  6. Flexibility in Capital Structure: Bonus shares provide flexibility in adjusting a company’s capital structure by increasing the equity base.

Disadvantages:

  1. Dilution of Ownership: Bonus shares dilute the ownership percentage of existing shareholders due to the increase in the total number of shares.
  2. Share Price Adjustment: Bonus share issuance can lead to a downward adjustment in the share price due to the increased supply of shares in the market.
  3. Lower Dividend per Share: As the number of shares increases, the dividend per share may decrease, potentially affecting the income received by shareholders.
  4. Limited Impact on Small Investors: Bonus shares may have a limited impact on small investors holding a few shares.
  5. Administrative Complexities: Issuing bonus shares involves administrative procedures and regulatory compliance, which can be time-consuming and resource-intensive.
  6. Shareholder Expectations: The issuance of bonus shares may create higher expectations among shareholders for future bonus issuances or dividend payouts.
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Why do companies issue bonus shares?

Companies issue bonus shares for various reasons. One key motive is to reward their existing shareholders. By providing additional shares at no cost, companies enhance shareholder value and foster loyalty among their investor base. Bonus shares also allow companies to efficiently utilize their retained earnings or reserves, distributing them to shareholders without depleting cash reserves. Furthermore, issuing bonus shares can improve the company’s market perception, signalling financial strength and growth prospects to potential investors. 

The increase in outstanding shares enhances market liquidity, making it easier for investors to buy and sell shares. Additionally, bonus shares can stimulate trading activity, attract new investors, and comply with regulatory requirements.

How can we get a bonus share in Nepal?

The process for obtaining bonus shares is simple. The bonus shares are automatically credited to your Demat account, and you can view them in your Meroshare account once they have been distributed. If a company declares a 25% bonus share, you will have an additional 25% of shares deposited directly into your Demat account for that particular company. 

There is no application required for bonus shares. The only requirement is to ensure that you hold the company’s shares in your Demat account before the book closure date specified by the company. As long as you meet this criterion, you will automatically be eligible to receive bonus shares when they are distributed.

Does a Bonus Issue Affect Company Share Price?

A bonus issue could impact a company’s share price. It may lead to a dilution of ownership and a decrease in earnings per share, which can negatively affect the share price. However, a bonus issue can also be viewed positively as a sign of financial strength and prospects, increasing investor confidence and demand for the shares. The impact on share price depends on market conditions, investor sentiment, and overall company performance.

Therefore, bonus shares are a mechanism used by companies to distribute additional ownership to existing shareholders without affecting the company’s market capitalization. But bonus shares can dilute ownership and potentially impact share prices; they are generally viewed positively to enhance shareholder value and attract investors. In Nepal, bonus shares are distributed directly to shareholders’ Demat accounts, which helps to get benefits from the bonus issuances.


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