10 Things you should know about issue of Bonus Shares and Dividend

By September 27, 2017 Economy No Comments

As investor, one would like to buy stocks which pays high dividend or allows him take advantage of bonus shares issued from time to time. The basic fundamental of investing in stocks suggest participating in the profit of the company. Getting lucky to grow your wealth is not the strategy, having right amount of knowledge and using the right opportunity at right time helps in doing to do so. This article will assist us in understanding the terminologies for enjoying corporate benefits.

1. Book closure Date –

Book closure and record date help a company determine exactly the shareholders of a company as on a given date. Book closure refers to the closing of register of the names or investors in the records of a company. Companies announce book closure dates from time to time.

2. Record date –

The benefits of dividends, bonus issues, rights issue accruing to investors whose name appears on the company’s records as on a given date, is known as the record date.

An investor might purchase a share-cum-dividend, cum rights or cum bonus and may therefore expect to receive these benefits as the new shareholder. In order to receive this, the share has to be transferred in the investor’s name, or he would stand deprived of the benefits. The buyer of such a share will be a loser. It is important for a buyer of a share to ensure that shares purchased at cum benefits prices are transferred before book-closure. It must be ensured that the price paid for the shares is ex-benefit and not cum benefit.

3. Difference between book closure and record date –

In case of a record date, the company does not close its register of security holders. Record date is the cutoff date for determining the number of registered members who are eligible for the corporate benefits. In case of book closure, shares cannot be sold on an Exchange bearing a date on the transfer deed earlier than the book closure. This does not hold good for the record date.

4. No-delivery period –

Whenever a company announces a book closure or record date, the Exchange sets up a nodelivery (ND) period for that security. During this period only trading is permitted in the security. However, these trades are settled only after the no-delivery period is over. This is done to ensure that investor’s entitlement for the corporate benefit is clearly determined.

5. Ex-dividend date –

The date on or after which a security begins trading without the dividend (cash or stock) included in the contract price.

6. Ex-date –

The first day of the no-delivery period is the ex-date. If there is any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits.

7. Bonus Issue –

While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue.

If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonus he will hold three.

8. Split –

A Split is book entry wherein the face value of the share is altered to create a greater number of shares outstanding without calling for fresh capital or altering the share capital account. For example, if a company announces a two-way split, it means that a share of the face value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one share now holds two shares.

9. Buy Back of shares –

As the name suggests, it is a process by which a company can buy back its shares from shareholders. A company may buy back its shares in various ways: from existing shareholders on a proportionate basis; through a tender offer from open market; through a book-building process; from the Stock Exchange; or from odd lot holders. A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot transactions or through any private arrangement.

10. New share dividend –

In case a company issues new shares in any financial year, then these shares are eligible only for pro rata dividend in respect of the financial year in which these are issued. The old and the new shares thus carry disproportionate rights as to dividend, although their market price remains the same. To compensate the buyer to whom these new shares are delivered for loss of pro rata dividend, the seller of new shares has to pay to the buyer, the dividend declared in respect of old shares. This old-new compensatory value is called as new share dividend. The Exchange publishes a list of the scrips that are eligible to receive the pro rata dividend per settlement.

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