What is Bonus Issue?

About Bonus Issue:

• A bonus issue, also known as a scrip issue or a capitalization issue, occurs when a company listed on a stock exchange decides to offer free additional shares to the existing shareholders.
• The company decides the number of bonus shares to be allotted to every individual investor for holding a certain number of shares over a set period of time and accordingly rewards them.
• For example:
  • In a 2:1 bonus issue, you get two extra shares for every one share you already own.
  • If you had 10 shares, after the bonus, you’ll hold 30 shares.
  • However, the share price will drop proportionally so that your total investment remains the same.
• This bonus issue aims to attract further investment and reward its existing shareholders as it improves the entity’s market image.
• A bonus issue of shares will increase a company’s share capital but not its market capitalisation.
  • Market capitalisation is calculated by multiplying the company’s current stock price and the total number of outstanding shares. Share capital is the amount that the company raises by issuing shares.
  • By issuing bonus shares, the number of outstanding shares increases with a proportional decrease in the value of each share, ensuring no change in the market capitalization. However, the face value of the shares remains unchanged.
• Bonus shares do not dilute shareholders’ equity because they are issued in a constant ratio that keeps the relative equity of each shareholder the same as before the issue.
• The important thing to note is that companies issue bonus shares from their reserves or retained profits. Instead of paying out cash, they convert their saved earnings into shares and distribute them among shareholders.
• The issuance of bonus shares is not taxable; however, shareholders must still pay capital gains tax if they sell them for a net gain.

What is a Stock Split?

• A stock split is an action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares.
• A split is usually undertaken when the stock price is high, making it pricey for investors to acquire.
• It brings down the share price as the number of shares increases.
• The market cap of the firm and the value of each shareholder’s investment stay unchanged after a stock split.