Is it Smart to Buy Stocks Just Before Becoming Ex-Bonus?

Yes, certainly it is a good idea to buy shares of companies that have announced issue of bonus shares.

But there is a very big and important “IF” attached.

What is and why is the big “IF”?

The company that has announced the bonus MUST:

1. Have been thoroughly investigated by you before hand, it meets all the stringent value investing norms. It should already finding a place in your portfolio. This means that you cannot buy a tom-dick-and-harry stock just because a bonus has been declared.
2. Currently the price must be reasonable and the stock must be trading / available at a fair price/ valuation - that is you will be willing to buy the stock even if there was no bonus issue.

After having bought the shares be prepared to witness a sharp fall in the market price of the share you just bought, after the ex-bonus dates. The fall in the price will be proportional to scheme of bonus issue. Suppose it is one bonus share for one existing share, the price will halve. If is it is one bonus share for two existing shares, the price will fall 33.33 %. Please see the following table:

Reason for the fall is that when bonus shares are issued the book value per share will fall, and since the price has relationship to the book value per share, the price too falls.

Finally, due to some inexplicable reasons the share price of good companies, after the steep fall, starts regaining its original price, before the bonus issue. Please see the following price graph of Rural Electrification Corporation which became ex-bonus on 28th September 2016:

Before becoming ex-bonus the share was trading at Rs.249.15. After becoming ex-bonus it had fallen to Rs.122.20. Again it started gaining and reached a high of Rs.220.55 in May 2017, a near 100% recovery.

In conclusion, yes, certainly it is a good idea to buy shares of otherwise excellent companies that have announced issue of bonus shares. The price will fall and recover the loss. You double the value of investment as well as dividends for many years in future.

I have done it and have profited from it.

Thank you,

With best regards,

Anand

Difference Between Bonus Share and Share Split

Picture Explains Distinction Between Bonus Share and Share Split

Actual Question:

How do I calculate bonus share and share split?

Answer:

Dear Friend!

Let us deal with both parts of your question separately.

Bonus Shares:

In the case of bonus shares the company issues fresh shares by utilizing the reserves for issue of fresh shares as a gesture of rewarding investors. Your account for the scrip with your broker will show the recipt of shares as a purchase with zero cost along side your regular purchases. Rural Electrification Corporation (REC) had issued a 1:1 bonus issue in August 2016 and fixed 29^th September as the record date for determining the eligible investors. The following table shows the actual bonus shares received in our ‘Portfolio 2K15’, which incidentally is 193 based on the total holding on 9^th September 2016.

	Purchase
Date	Qty	Rate	Cumulative Quantity
13/02/17	30	146.79	491
05/01/17	40	126.7	461
05/12/16	25	132.07	421
06/10/16	193	0	396
05/10/16	10	133.92	203
09/09/16	6	248.22	193
04/08/16	9	216.78	187
15/07/16	8	203.92	178
11/07/16	8	194.02	170
14/06/16	7	165.65	162
24/05/16	3	159.38	155
13/05/16	3	169.78	152
11/05/16	5	169.31	149
20/04/16	3	164.58	144
14/03/16	4	174.09	141
10/03/16	15	168.85	137
04/03/16	9	168.52	122
24/02/16	4	160.21	113
12/02/16	4	171.01	109
03/02/16	5	187.31	105
18/01/16	15	196.6	100
07/01/16	4	222.11	85
08/12/15	20	223.9	81
14/10/15	17	264.77	61
27/08/15	4	255.88	44
04/08/15	10	274.34	40
22/07/15	10	284.39	30
12/06/15	4	277.99	20
07/04/15	6	327.68	16
06/04/15	10	334.71	10
	491

As far as tax treatment is concerned, even though I am not a tax expert, the bonus shares are deemed to be issued on 6^th October 2016 the day they are credited to your account. The cost of acquisition is zero. In case we sell the shares before 5^th October 2017 the entire sale proceeds relating to these 193 bonus shares will be treated as short-term capital gains. If sold after 5^th October 2017 the entire sale proceeds are long-term capital gains for which there is no tax in the present tax scheme.

Share Split:

There is no real example of share-split in our portfolio. Therefore let us assume that instead of a bonus shares REC split the shares with the face value of Rs.10 into two with the face value of Rs.5 each. In such a case the table will look as follows:

Date	Purchase			Share-Split
	Qty	Rate	Split Quantity		Split Rate
13/02/17	30	146.79	30		73.40
05/01/17	40	126.7	40		63.35
05/12/16	25	132.07	25		66.04
05/10/16	10	133.92	10		66.96
09/09/16	6	248.22	12		124.11
04/08/16	9	216.78	18		108.39
15/07/16	8	203.92	16		101.96
11/07/16	8	194.02	16		97.01
14/06/16	7	165.65	14		82.83
24/05/16	3	159.38	6		79.69
13/05/16	3	169.78	6		84.89
11/05/16	5	169.31	10		84.66
20/04/16	3	164.58	6		82.29
14/03/16	4	174.09	8		87.05
10/03/16	15	168.85	30		84.43
04/03/16	9	168.52	18		84.26
24/02/16	4	160.21	8		80.11
12/02/16	4	171.01	8		85.51
03/02/16	5	187.31	10		93.66
18/01/16	15	196.6	30		98.30
07/01/16	4	222.11	8		111.06
08/12/15	20	223.9	40		111.95
14/10/15	17	264.77	34		132.39
27/08/15	4	255.88	8		127.94
04/08/15	10	274.34	20		137.17
22/07/15	10	284.39	20		142.20
12/06/15	4	277.99	8		139.00
07/04/15	6	327.68	12		163.84
06/04/15	10	334.71	20		167.36
	298		491

In the case of share-split the number is doubled and the rate is simply halved. The date of acquisition is the same as the date of original purchase. The logic behind it is that the same share has been split into two – no new share is created – therefore the original date of acquisition remains intact.

The tax treatment is the cost of acquisition (the halved cost in this example) will be deducted from the selling price to arrive at the capital gains. The long or short term is determined with respect to the original date of acquisition.

Thank you,

With Best Regards

Anand