Bonus, Dividend and a Purchase on the Ex-Date

Entitlement is fixed by who appears on the company's register of beneficial owners on the record date, not by who owns the shares on that afternoon. Under T+1 settlement, a trade on day T settles on the next working day, so the last trade that can settle on or before the record date is the trade of the previous working day.

• Record date: Friday 19 May.
• Last day to buy with entitlement (cum-date): Wednesday 17 May - settles Thursday 18 May, so the buyer is on the register on Friday.
• First day to buy without entitlement (ex-date): Thursday 18 May - this trade settles on Friday 19 May, the record date itself, which does not confer entitlement. The price is marked down for the corporate action on this date.

Karan bought on the ex-date. The 400 shares are ordinary post-bonus, post-dividend shares carrying no entitlement to that corporate action. The seller of those shares received the bonus and the dividend. His receipt of Rs 4,000 (800 x Rs 5) and 800 bonus shares is exactly the entitlement on his original holding, so the company and registrar behaved correctly. The error was his assumption that holding shares on the record date is what matters, rather than the settlement date of the purchase.

The company split its value across twice as many shares and paid out cash. The theoretical ex-price adjusts for both:

Theoretical ex-price = (cum-price - dividend) / bonus factor = (940 - 5) / 2 = Rs 467.50.

The Rs 5 dividend leaves the company's books, and the 1:1 bonus doubles the share count with no change in earnings or assets, so each share must represent half as much. Whether PQR actually opens at Rs 467.50 depends on the market that day; the adjustment is an arithmetic benchmark, not an exchange-imposed price.

Karan's original holding: 800 x Rs 940 = Rs 7,52,000 before the ex-date. After the ex-date: 1,600 shares x Rs 467.50 = Rs 7,52,000, plus Rs 4,000 cash dividend (ignoring dividend distribution tax, which is not payable by the investor). No value was wiped out. His 400 new shares at Rs 468 were bought at the adjusted price - he paid fair ex-bonus value, and received fair ex-bonus shares.

The complaint that the exchange allowed a price at half the previous close reflects a common confusion between a price adjustment and a loss. Indices and price bands are adjusted for corporate actions precisely so that a bonus or split is not treated as a crash.

Holding and cost. He holds 800 + 800 = 1,600 shares. For tax purposes, the total cost of acquisition of the original 800 shares is spread over 1,600 shares, so the per-share cost halves; the holding period of the bonus shares is generally reckoned from the date of allotment of the bonus shares, while the original shares keep their original holding date. The 400 shares bought on 18 May have their own cost (Rs 468 each) and their own holding date.

The delivery trap. The 800 bonus shares are credited only after the record date - typically a couple of working days later. If Karan sells 1,600 shares on the ex-date or immediately after, his free balance holds only the 1,200 shares he actually owns in the account at that moment (800 original plus 400 purchased), and his sale of 1,600 will short-deliver 400 shares. The exchange will auction those shares and debit him the difference and penalty, exactly as if he had sold shares he did not own.

The practical rule: sell only against the free balance shown in the DP statement, wait for the bonus credit before selling the enlarged quantity, and remember that in T+1 there is only one working day in which to fix any mismatch. Also note that the dividend is taxable in the investor's hands, so the Rs 4,000 is not net cash.