Bonus share issues: Sebi prescribes timelines to reduce investor risk

To protect investors from market volatility, the Securities and Exchange Board of India has proposed reducing the time needed for bonus shares issued by a company to be made available for trading.

In the consultation paper released on Monday, the market regulator has prescribed timelines for crediting and trading in bonus shares under its Issue of Capital and Disclosure Requirements regulations.

“To facilitate fast credit and trading of shares allotted pursuant to bonus issue and to reduce investors’ risk of market volatility due to any delay in credit of bonus shares, it is proposed to streamline and reduce timelines of bonus issue enabling T+2 trading of shares post record date (T Day),” Sebi said in its consultation paper.

‘T’, in this case, stands for the record date or the cut-off date when a company finalises the list of shareholders eligible for bonus shares.

Sebi has invited comments on the paper till 26 August.

The regulator noted that while ICDR regulations prescribed overall timelines for implementing a bonus issue, there were no specific timelines. For bonus issues, ‘implementing’ is the date of commencement of trading.

“Sebi has been trying to reduce timelines so money can be utilised effectively and is not lying around. Earlier it used to take 5-6 days to trade,” said Anand K. Rathi, co-founder of MIRA Money, a wealth management platform.

The prescribed procedure

As per market practice, a company’s existing shares remain available for trading post the record date of the bonus shares under existing international securities identification number. Shares issued after a bonus issue are credited and made available for trading in 2-7 working days post the record date.

Sebi has now stated that once a company secures the approval of its board to issue bonus shares, it should notify the stock exchanges of the decision within five working days. Following that, the bonus shares should be allotted to the demat accounts of investors the next working day, and be available for trading the following day.

The procedure that Sebi proposes to implement begins with the issuer proposing a bonus issue to the stock exchange for in-principle approval within five working days from the date of the board meeting approving the bonus issue.

The issuers shall ensure submission of the documents to the depositories for credit of bonus shares on T+1 day. After this, the shares allotted to the bonus issue have to be made available for trading on the next working date of allotment, which is T+2 days.

“These measures of Sebi including introducing T+2 trading, settlement at T+1 and optional T+0, would mean investors will be able to access capital locked in the market in an efficient way,” Rathi said. “This would mean better utilisation of money, better turnover and better savings. This will lead to huge savings for investors.”

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