A bonus issue effectively transfers the general reserves of a company into share capital. The general reserves essentially consist of the share premium collected from shareholders and the reserves created from accumulated profits over the years. Both the share premium reserve and the general reserve are collectively referred to as free reserves, which mean it can be freely distributed among the shareholders. Bonus is declared in terms of the proportionate ratio. Bonus does not change the net worth of the company as it is just a transfer from the reserves to the share capital. Let us understand how the shares of Colgate have grown through bonuses since 1982…

Year

Starting Shares

Bonus Ratio

Bonus Factor

Ending Shares

Assume that you had bought 1000 shares in 1978 in the OFS at Rs.25 (10+15)

1982

1,000

1:1

2X

2,000

1985

2,000

1:1

2X

4,000

1987

4,000

1:1

2X

8,000

1989

8,000

1:1

2X

16,000

1991

16,000

3:5

1.6X

25,600

1993

25,600

1:1

2X

51,200

2015

51,200

1:1

2X

102,400

What the above table indicates is that if you had bought 1000 shares of Colgate in 1978 in the OFS at Rs.25, you would have invested Rs.25,000/- back then. Purely on the strength of the bonuses, your investment would have grown to 102,400 shares. At the current price of Rs.1040/- your investment in Colgate will be worth Rs.10.65 crore. That works out to a mind-boggling compounded annual return of 24% over the last 39 years. But remember, this is not just because of the bonus but also because of the performance and market penetration of Colgate.

Abhisha Yadavanswered.A bonus issue effectively transfers the general reserves of a company into share capital. The general reserves essentially consist of the share premium collected from shareholders and the reserves created from accumulated profits over the years. Both the share premium reserve and the general reserve are collectively referred to as free reserves, which mean it can be freely distributed among the shareholders. Bonus is declared in terms of the proportionate ratio. Bonus does not change the net worth of the company as it is just a transfer from the reserves to the share capital. Let us understand how the shares of Colgate have grown through bonuses since 1982…

YearStarting SharesBonus RatioBonus FactorEnding SharesAssume that you had bought 1000 shares in 1978 in the OFS at Rs.25 (10+15)1982

1,000

1:1

2X

2,000

1985

2,000

1:1

2X

4,000

1987

4,000

1:1

2X

8,000

1989

8,000

1:1

2X

16,000

1991

16,000

3:5

1.6X

25,600

1993

25,600

1:1

2X

51,200

2015

51,200

1:1

2X

102,400

What the above table indicates is that if you had bought 1000 shares of Colgate in 1978 in the OFS at Rs.25, you would have invested Rs.25,000/- back then. Purely on the strength of the bonuses, your investment would have grown to 102,400 shares. At the current price of Rs.1040/- your investment in Colgate will be worth Rs.10.65 crore. That works out to a mind-boggling compounded annual return of 24% over the last 39 years. But remember, this is not just because of the bonus but also because of the performance and market penetration of Colgate.