SHARETIPSINFO >> Articles Directory >> Meaning of cum right and cum bonus in Indian stock market trading
Cum rights is a term so familiar in the share market. It is nothing but a situation where the share holders of a particular share market will be allowed to take the rights offering announced by a company. The most important aspect with respect to the cum-rights is that the shares which are traded by cum rights have the facility to be sold to another individual along with the specific rights of the share. This is actually a concept which is just opposite to the ex-rights where the rights cannot be transferred with the shares from the old owner of the shares to a new share holder. Also the price has a great difference as the shares with cum rights are normally costlier than those with ex-rights.
Current holders of the shares in a market get the right to acquire new shares when the company declares a rights issue. This is mainly done at a discount rate. This right will be attached to the shares and this share right will have a value. Before the issue has been completed, the main issue is in determining whether the rights issue stays back at the vendor or will be transferred to the participator who will get a share in the rights issue. Here comes the need for cum-rights and ex-rights. The cum-rights will be offered to the buyer through the sale as the rights will be given to the buyer. The ex-rights on the other side will not be given for sale. The phrase cum in cum-rights means that the added advantages will be included along with the stocks.
A share is known to trade cum-rights when the buyers will be given the rights issue. If the share is given away as ex-rights, it can’t transfer the rights. The calculation required to compare the ex-rights and the cum-rights is entirely different. Using the rights issue, the company can get capital through the selling of shares. The shares will be given to the share holders based on the ratio of the shares hold by them. The new shares will be given to the buyers at a low rate which permits them to secure the new shares.
Rights are securities that can be traded through selling and buying. This permits the users who don’t want to buy new shares to sell their rights to some one who is interested in buying the share. This makes shares highly important. At the same time, if they have the right with them, they can easily get a new share.
Shares can be ex-bonus and cum-bonus. The share is generally known as cum-bonus in case where the purchaser will receive the current bonus. Before a bonus share is issued, the board of directors is supposed to propose the bonus during a board meeting. This issue will be approved in the company meeting. Then the company directors can decide whether they can give shares to particular shareholders. The date of the issue of shares is known as record date.
Those shares that are bought before the record date are known as cum-bonus. This creates a situation where the investor should buy the bonus shares. Just opposite to this, those shares which are sold after the record date forms the ex-bonus. The value of the shares under the cum-bonus will have high value. The bonus shares can be used by investors to plan their tax according to their advantage. They can sell the bonus shares to get money to invest in a house or a plot. This can earn him money as the shares will be invested on something good as a house.
Supreme Court has laid down certain law in the calculation of the tax on assets. According to this, the shares which are brought as cum-bonus will have a different calculation of tax. The cum-bonus will be taken as a bundle which has several rights. If the part of the shares is sold, this cost is not considered and the average of the cost is considered. This will lead to litigation. The income tax will not consider this as a correct account view leading to legal problems.
There are certain points to be considered if the people want to buy cum-shares and intend to sell ex-bonus. They can buy the cum-shares after the announcement of the bonus shares has been made by the board of directors. But this has to be made before the shares have been approved by the shareholders. This might seem to be risky. This is mainly due to the risk involved in buying a share that is not approved by the share holder. But if we are closely monitoring the system, there is no risk involved at all. The bonus issue made by the directors in the board will be approved by the share holders without any doubt.
Investors are requested to know the various aspects of bonus shares to exempt themselves from the taxability related issues. The selling of original holding can cause them to face a capital loss. The loss can be short term or long term. But at the same time, it will be a benefit for him, if he tries to sell the holding after the first year of purchase.
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