Companies provide benefits to the shareholders in different forms. The benefits distributed by the companies are in two forms: 1) Cash Benefits and 2) Non cash benefits. Cash benefits are dividend, interest payment etc. while non cash benefits are bonus, rights, split etc.
When a company decides to distribute benefits, it does it on a particular date which is called as,' Record Date' and,' Book Closure Date' (This article discusses the concept of record date only). The benefit is distributed by the company on record date and hence all shareholders who have legal ownership of shares as on record date get the benefit.
While it is extremely easy for a company to decide to whom the benefit should be given, the other entity involved in the process of exchange of shares i.e. stock exchange f aces the issue of who should get the benefit given by the company. To substantiate this with an example, should a person who has purchased the shares on record date get the benefits announced by the company? The answer would be no to this question since the name of the shareholder in the records of the company will change only after two days as the settlement is done on T+2 basis in equity transactions in India and T+3 basis on some other countries.
To ensure that there is no ambiguity on the matter, the stock exchanges have developed a concept of cum-benefit and ex-benefit. All those shares which are purchased before ex-date are entitled to receive benefits. This effectively means that these shares have been traded on cum basis. 'Cum' in this context means with benefit, while 'Ex' means without benefit.
How does this concept work? Suppose a company XYZ Ltd. has decided to provide bonus shares on 1:1 basis and has fixed record date as 01-Mar-2011. The stock exchange will announce an ex-date for this corporate benefit of bonus. The ex date is one business date prior to the record date( If the settlement is done on T+2 basis). So in case 28-Feb-2011 is working day, the ex-date will be 28th February. All the shares purchased on and after 28th February will not be entitled for benefit of bonus shares announced by the company. The market also adjusts the price in ratio of the benefit announced by the company. Hence the shareholders who purchase shares after ex-date don't lose any amount.
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