Unlisted Bonus Shares: Meaning, Benefits & Risks

Summary

We all have heard of bonus shares but sometimes there is a little confusion about what exactly they are, how they work and what benefits or risks are involved. Through this article we will understand about bonus shares in detail and we assure you that after this you will never be confused about them again.

What Are Unlisted Bonus Shares?

First thing to keep in mind is that bonus shares are the same in case of both listed and unlisted companies.

Unlisted bonus shares are simply extra shares given free of cost to the existing shareholders of an unlisted company.
They are always issued in proportion to the shares already held -

For example - If an investor holds 10 shares of a company and the company declares a 1:1 bonus issue then for every one share held the investor will receive one additional share free of cost.
This means the total number of shares will double from 10 shares to 20 shares. However, the overall value of the investment remains the same because the market value per share adjusts accordingly. 

So, while the number of shares increases the price per share reduces in the same proportion ensuring that the total investment value does not change immediately means if you hold 10 shares priced at ₹1,000 each your total investment is ₹10,000 after a 1:1 bonus you will have 20 shares but now each share will be valued at around ₹500. The net worth of your holding will still be ₹10,000, it does not increase instantly just because of the bonus shares. It's just that your number of shares are increasing, the company does not give you any extra monetary benefits.

How Do Unlisted Bonus Shares Work?

When an unlisted company issues bonus shares, it is not creating wealth out of the air, it is simply converting a part of its reserves into share capital.

 Where do these reserves come from?

Reserves are mainly retained earnings of the company profits that were earned in previous years but not distributed as dividends, instead of paying all profits to shareholders the companies keep some portion aside as savings for future use.
These reserves reflect financial strength and can be utilized in various ways, one of which is issuing bonus shares.

 How the process works:

1. The company decides to reward the shareholders by issuing bonus shares.

2. It transfers a portion of its reserves (retained earnings) into share capital.

3. Shareholders get free additional shares in proportion to their existing share holding.

4. The share capital of the company increases while the reserves reduces by the same amount.

5. Importantly, the overall net worth remains unchanged because it’s just a reallocation between reserves and share capital.

 Example - 1:1 Bonus Issue

• A company has:

• Reserves = ₹10 crore

• Share Capital = ₹5 crore (50 lakh shares of ₹10 face value each)

• The company announces a 1:1 bonus issue.

• To issue 50 lakh new bonus shares, the company needs to transfer ₹5 crore from reserves to share capital.

After Bonus Issue:

• Reserves = ₹5 crore (reduced by ₹5 crore)

• Share Capital = ₹10 crore (doubled)

• Number of shares = 1 crore shares (instead of 50 lakh).

Shareholders’ proportion of ownership remains the same but the number of shares they hold has doubled.

Why Do Unlisted Companies Issue Bonus Shares?

• Reward Shareholders Without Cash Outflow - Instead of paying dividends on shares the company rewards investors with bonus shares this keeps cash free business growth while still giving value to its shareholders.
  
  
• Utilizing Accumulated Reserves - Sometimes companies have large retained earnings so issuing bonus shares is a way to convert part of these reserves into share capital.
  
  
• Helps to Build Investor Confidence - A bonus issue signals that the company is financially strong and also confident about its future growth this can improve goodwill of the company among shareholders.
  
  
• Restructuring Capital Before IPO - Many unlisted companies issue bonus shares to increase the number of outstanding shares before converting into a public company which helps in keeping the IPO price per share more attractive and affordable for the retail investors.
  
  
• Improving Liquidity in Unlisted Market - This helps in circulation of more shares in the market which means higher chances of buying and selling in the unlisted market.
  

Risks & Limitations of Unlisted Bonus Shares

No immediate liquidity - Unlisted shares cannot be easily traded and finding a buyer in the unlisted market may be difficult.

Unclear valuation of security - The value of unlisted shares depends on private negotiations between buyer and seller not on a transparent market which creates an uncertainty about the true worth of your holdings.

No instant wealth creation of investors - A bonus issue only increases the number of shares while reducing the per share value proportionately because of which your net worth remains the same at the time of issue.

Company performance risk - If the company fails to grow or delays its IPO after listing the benefit of holding bonus shares may never be useful.

Conclusion

Bonus shares in unlisted companies work exactly like in listed ones, they increase the number of shares you hold without changing your overall investment value immediately. The company issues them by converting reserves into share capital mainly to reward shareholders, strengthen confidence, restructure capital or prepare for an IPO.

For investors the real benefit comes later when the company grows, lists at a good valuation or starts giving dividends and those extra shares can multiply your overall returns but at the same time, risks exist such as lack of liquidity, unclear valuation and company performance.

So, while unlisted bonus shares are a positive signal of financial strength, they should be seen as a long-term value creator, not an instant profit maker and if you want to explore or invest in unlisted shares then you can check Sharescart.com for more insights about unlisted shares.