Bonus shares are a widely used technique that companies employ to show appreciation to its shareholders. This method involves the issuance of additional shares at free of cost, based on the number of shares that are currently held.
In other words, bonus shares are extra shares that are provided to current shareholders at no additional cost. The ratio in which the firm issues these shares (1:1, 2:1, or 3:2), means that the shareholder receives more shares in proportion to each share retained. For example, a shareholder that holds 100 shares, would get an additional 100 shares in a 1:1 bonus issue, doubling their stake.
Bonus shares don’t change the investment’s total worth/value because the share price normally increases to reflect the additional shares. For shareholders in India, understanding how these bonus shares are credited and their impact on demat accounts is essential to manage their portfolios effectively.
How Does Your Demat Account Get Credited with Bonus Shares?
A demat account is used to hold shares electronically. The steps listed below describe how shares are credited to your demat account in India, as soon as a firm announces a bonus issue:
1. Declaration and Record Date
In addition to announcing the bonus issue, the firm also establishes a record date. This acts as the cutoff point for determining whether the shareholders qualify for bonus shares. To be eligible for the bonus shares, shareholders must have the company’s shares in their demat account on this record date.
2. Automatic Credit to the Demat Account
Once the record date has passed, the firm will credit the bonus shares to the demat accounts of the shareholders who are qualified for them. This process is usually automatic and normally occurs within a few days of the bonus shares being issued. You do not need to take any action as a shareholder, to obtain these shares. They will come up in your demat account with the revised holdings.
3. Notification to Shareholders
Generally, shareholders are informed of the credit of bonus shares through a notification by the firm. This communication is usually held via email or through the depository participant (DP). This message will also include the updated total number of shares held following the bonus issue.
Impact of Bonus Shares on Your Demat Account
Getting bonus shares in your demat account comes with several implications. Some of these include:
1. Increased Shareholding
This is one of the most immediate impacts. While the overall value of your investment stays the same initially (due to the adjustment in share price), holding more shares multiplies your potential for future dividends and capital gains in case the share price appreciates.
2. No Tax Repercussions for the Receipt
Upon receiving bonus shares, there is no immediate tax obligation in India. Nevertheless, the date of the bonus share allocation determines the holding period for tax purposes while you sell these shares. Eventually, the applicable capital gains tax will vary depending on the nature of the gains; whether they are long-term or short-term.
3. Modifications to Portfolio Allocation
The allocation of your portfolio may change with the bonus share issuance. For example, if you receive a massive number of bonus shares from a particular firm, that stock may end up representing a larger percentage of your overall portfolio, which could change your risk profile.
4. Upkeeping Demat Accounts
Keeping up-to-date records and making sure your account has a nominee are some of the essential factors to consider when the number of securities in your demat account rises. In India, it is very crucial to have a Demat account nominee. This is because in case the account holder passes away, this feature allows for the seamless transfer of securities and investments to the nominee, without causing any legal problems.
5. Effect on Upcoming Transactions
The modified cost of acquisition will be shown in your demat account when you ultimately decide to sell the shares, including the bonus shares. This is important for calculating capital gains, since the cost of the original shares and bonus shares may need to be apportioned for tax purposes.
Wrapping Up
Investors in India need to understand how these bonus shares are credited to their demat accounts and how it affects their portfolio subsequently. Equally important is ensuring that your demat account has a nominee to protect your investments. As always, staying informed is the key to managing your demat account effectively and maximising the benefits of your investments.