[Analysis] SEBI’s New Guidelines to Speed up Credit and Trading of Bonus Shares | Effective from October 2024

Bonus Shares are additional shares that a company issues to its existing shareholders without any extra cost, based on the number of shares a shareholder already owns. These shares are given out of the company's accumulated profits or reserves, typically in lieu of a cash dividend. Issuing bonus shares increases the total number of shares outstanding but does not affect the overall market value of the company, as the share price adjusts accordingly.
SEBI has introduced significant reforms to expedite the process of issuing bonus shares, making it more efficient and transparent for investors. As per a circular issued on September 16, 2024, SEBI's new guidelines reduce the time required for the credit and trading of bonus shares from the record date of issuance. Starting from October 1, 2024, companies must declare the deemed allotment date as the next working day after the record date (T day), and the bonus shares will be available for trading by T+2 day. These changes aim to streamline the bonus share process, fostering a more stable and dynamic market environment while minimizing uncertainty and enhancing investor confidence.

Table of Contents

1. Introduction
2. Current Regulatory Framework for Bonus Issues
3. Background and Rationale Behind the Amendment
4. SEBI Reduce the Time Taken for Credit and Trading of Bonus Shares
5. Conclusion – Enhanced Market Efficiency and Investor Confidence

1. Introduction

SEBI is introducing significant changes to speed up the process of issuing bonus shares, making it more convenient for investors. On September 16, 2024, SEBI issued a circular[1] aimed at reducing the time required for the credit and trading of bonus shares from the record date of issuance. Under this new guideline, when a company fixes and announces the record date (T day) to the stock exchange, it must also declare the deemed allotment date, which will be the next working day after the record date. Moreover, the shares will be available for trading by T+2 day. These changes will apply to all bonus issues announced on or after October 1, 2024. This move enhances the efficiency and transparency of the bonus share process, benefiting investors and fostering a more dynamic market.

2. Current Regulatory Framework for Bonus Issues

Under Regulation 295(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, when an issuer announces a bonus issue, it must implement the bonus within 15 days from the date of approval by its board of directors. SEBI defines the implementation date as the date when trading of the bonus shares begins.

If shareholder approval is required, the bonus issue must be implemented within two months from the board meeting where the decision to announce the bonus issue was made, subject to that approval.

While the ICDR Regulations provide an overall timeline for implementing bonus issues, they do not specify the timeline for crediting bonus shares or making them available for trading from the record date. This lack of clear guidelines creates inconsistencies in the timing of credit and trading of bonus shares, leading to uncertainty and potential disruptions in the market.

3. Background and Rationale Behind the Amendment

On August 5, 2024, SEBI issued a Consultation Paper titled “Streamlining the Process and Reduction in Timelines of Bonus Issue,” aimed at promoting uniformity in the timelines for the crediting and trading of bonus shares from the record date. The proposal focuses on reducing the overall timelines by enabling T+2 trading of bonus shares after the record date.

Currently, after a bonus issue is announced, existing shares continue to trade under the original International Securities Identification Number (ISIN), while the new bonus shares are credited to the ISIN within 2-7 working days. This inconsistency in the timeline exposes the market to risks such as price fluctuations and increased volatility.

To address these issues, SEBI has proposed clear timelines for the crediting and trading of bonus shares following the record date. This amendment aims to ensure a more structured and predictable process, reducing discrepancies and enabling investors to access their entitlements more promptly. By minimizing delays and enhancing transparency, the standardized timelines are designed to create a more stable and efficient trading environment, ultimately boosting investor confidence and market stability.

4. SEBI Reduce the Time Taken for Credit and Trading of Bonus Shares

SEBI has shortened the time required for crediting and trading bonus shares from the record date under the SEBI (ICDR) Regulations, 2018. The updated timelines are as follows:

• Application for In-Principle Approval – Issuers proposing a bonus issue must apply for in-principle approval from stock exchanges under Regulation 28(1) of the LODR Regulations, 2015, within 5 working days from the board meeting approving the bonus issue.
• Setting and Recording Dates – When the issuer sets and informs the stock exchange of the record date (T day) for the bonus issue, they must also record the deemed allotment date on the next working day after the record date (T+1 day).
• Stock Exchange Notification – Upon receiving the record date and required documents from the issuer, the stock exchange must issue a notification confirming the record date and the number of shares involved in the bonus issue. The notification must also include the deemed allotment date.
• Credit of Bonus Shares to Depository System – After the stock exchange accepts the record date, the issuer must ensure that the required documents are submitted to the depositories for crediting the bonus shares by 12 p.m. on the next working day following the record date.
• Trading of Bonus Shares – The bonus shares must be available for trading on the next working day after allotment (T+2 day). The issuer is responsible for uploading the distinctive number (DN) ranges in the depository’s DN database, and the stock exchange must update the relevant dates before crediting the bonus shares.

5. Conclusion – Enhanced Market Efficiency and Investor Confidence

By establishing clear and consistent timelines for the crediting and trading of bonus shares, SEBI aims to reduce uncertainty and increase transparency in the process. This ensures prompt credit of shares, minimizes investors’ exposure to market volatility, and reduces potential disruptions, allowing investors to receive their entitlements in a timely manner and make informed decisions.

These measures not only enhance market efficiency but also build investor confidence by creating a more predictable and reliable trading environment. SEBI’s proactive steps in refining the bonus issue process demonstrate its commitment to safeguarding investor interests and promoting a stronger capital market ecosystem.

The impact of SEBI’s initiatives goes beyond operational improvements. With streamlined guidelines and reduced processing times, companies are encouraged to plan their bonus issues more effectively, improving corporate governance. This contributes to a healthier market where transparency and efficiency boost liquidity and investor participation. Ultimately, SEBI’s efforts reflect its forward-thinking approach to fostering a dynamic capital market that upholds fairness, accountability, and the highest standards of integrity.

[1] Circular No. CIR/CFD/PoD/2024/122, Dated: 16-9-2024