RIL's 1:1 bonus shares explained: Meaning, tax rules, and implications

What are bonus shares and how Reliance's latest announcement will impact investors

Reliance Industries Limited (RIL), India’s largest company by market capitalisation, made headlines during its 47th annual general meeting (AGM) held on August 29. Chairman and Managing Director Mukesh Ambani revealed that the company’s Board of Directors will meet on September 5 to discuss the issuance of bonus shares, potentially at a ratio of 1:1. This means that for every share currently held, shareholders could receive one additional share for free.

“Reliance Industries Limited has sent a notice to the stock exchanges that the Board of Directors will meet on September 5 to consider issuing bonus shares in the ratio of 1:1,” Ambani said, adding, “We are in the business of creating wealth for India and enhancing the quality of life of every Indian, every single day.”

 

Bonus shares are a strategic tool used by companies to reward shareholders and make their stock more accessible to a wider audience. While they don’t directly increase a company’s market value, they can enhance investor confidence and potentially attract new investors.

Here is everything you need to know about bonus shares, what they mean, and their impact on market capitalisation.

What are bonus shares?

Bonus shares are additional shares given to existing shareholders without any additional cost. Companies issue bonus shares as a way to reward shareholders and to capitalise on their accumulated reserves. For instance, if a company announces a bonus issue in the ratio of 1:1, it means that a shareholder will receive one additional share for every share they already own.

How do bonus shares work?

When a company announces a bonus issue, the board of directors decides the ratio of the bonus shares and the record date, which is the date on which you must be a shareholder to qualify for the bonus shares.

For example, if you hold 100 shares of RIL and the company issues bonus shares at a 1:1 ratio, you will receive an additional 100 shares, bringing your total to 200 shares.

Are bonus shares taxable?

For shareholders, receiving bonus shares is not a taxable event. However, when these shares are sold, any gains realised will be subject to capital gains tax. The cost of acquisition for these shares is considered to be zero, so the entire sale proceeds will be treated as a capital gain.

Why do companies issue bonus shares?

The primary reason for issuing bonus shares is to make the stock more affordable for retail investors, especially if the share price has risen significantly. By increasing the number of shares, the company lowers the per-share price, which can make the stock more attractive to small investors. Additionally, bonus shares are a way for companies to reward their loyal shareholders and to signal confidence in the company’s future profitability.

Impact on share capital and market capitalisation

It is important to note that while a bonus issue increases the number of shares in circulation, it does not increase the company’s market capitalisation. Market capitalisation is the total market value of a company's outstanding shares and is calculated by multiplying the share price by the total number of shares. After a bonus issue, the share price typically adjusts downwards to reflect the increased number of shares, but the overall market capitalisation remains the same.

RIL to issue bonus shares: Not the first time

RIL has a history of issuing bonus shares, having done so five times since 1980, with the most recent issue being in 2017. If the Board approves the upcoming 1:1 bonus issue on September 5, shareholders will double their shareholding in the company without any additional investment. This move aligns with Mukesh Ambani’s statement at the AGM, where he emphasised the company’s commitment to creating long-term wealth for its shareholders.

For RIL shareholders, the upcoming Board meeting on September 5 could bring significant news, adding to their shareholding at no extra cost.