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Bonus issues on the rise
Fri, 6 Feb Pre-Open

Bonus issue basically implies the issue of additional shares by the company to its shareholders. Investors usually cheer when a company announces a bonus issue. After all, they are getting additional shares without paying for it. Several companies have recently declared Bonus issues, like HCL technologies, Infosys, Godrej Industries, Tech Mahindra, Persistent systems and so on.

While the market generally rejoices the Bonus issue, how do stakeholders benefit from this?

One, investor gets additional shares in proportion to his/her current holdings without paying anything. However, while there are no immediate gains to the shareholder, as the total value of its shares in the company would remain unchanged owing to the price adjustment, it is the additional liquidity that augurs well for the stock over the long-term.

A note of caution...

There is nothing wrong with the practice of issuing bonuses; however such issues encourage speculative dealings. This may lift the stock price in the short term; while, there is no addition to the stock's intrinsic value. Further it is also important to note, that a company uses its free reserves - left after keeping aside the funds for reinvestment, for this bonus issue. While the latter leads to better liquidity, it does not suggest any tangible gains for shareholders.

Investors should bear in mind that the general factors like the growth prospects of the company, management capability, business model, etc. should continue to remain the deciding factors while making an investment decision. Hence, one should keep these aspects, and not whether the company will pay bonus issues or not in mind before committing money to stocks.

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