Bonus shares or bonus issue are additional shares distributed to the current shareholders without taking any cost. Bonus shares are distributed based upon the number of shares that a shareholder owns.
Issuing bonus shares does not involve cash flow. It increases the company’s share capital but not its net assets.
For example, suppose the current price of a company share is Rs 1000 and an investor holds 100 shares of a company. At present, the net asset of the investor is Rs 1, 00,000 (1 Lakh).
The company declares a 3:1 bonus that is for every one share, he gets 3 shares for free. That is a total 300 shares for free and his total holding will increase to 400 shares.
But now the share price of the company adjusted to Rs 250 and the net asset of the investor is Rs 1, 00,000 (1 Lakh).
Here you can see that the number of shares of the company increases but the net asset is the same as the previous.
- Though the number of shares increases, the underlying value of each share and the total market capitalization remain the same.
- A stock split or share split increases the number of shares in a company. The price is adjusted in such a way that before and after market capitalization of the company remains the same.
- A company may split its stock when the market price per share is so high.
- Stocks split help in increasing overall liquidity as new investors may get interested in purchasing shares.
How Bonus Issue is different from Stock Split?
A company announces a bonus issue when its cash reserves increase and it decides to convert the increased value into shares. Thus the shareholder gets a bonus share free of cost. Whereas the company announces a stock split when the share price of the company increases too high or beyond a certain level.
In Bonus Share, there is no change in face value but in Stock Split the face value of the stock is adjusted accordingly.