What is a bonus issue?

What is a bonus issue?

A Bonus Issue involves a company distributing additional shares to its existing shareholders free of charge, based on the number of shares they already own. This action increases the total number of shares in circulation but does not change the company's market capitalization. Consequently, while shareholders receive more shares, the value of each share adjusts proportionally, leaving the total investment value unchanged.

Example 1: 3:1 Bonus Issue

In a 3:1 bonus issue, shareholders receive three additional shares for every one share they currently hold.

      A. Scenario:
            Shares Owned Before Bonus: 100 shares
            Bonus Ratio: 3:1

      B. Calculation:
            Bonus Shares Received: 100 shares × 3 = 300 shares
            Total Shares After Bonus: 100 original shares + 300 bonus shares = 400 shares


      C. Impact on Share Price:
            If the share price before the bonus issue was ₹200, the post-bonus share price would adjust to:
            New Share Price: (₹200 × 100 shares) / 400 shares = ₹50 per share

Note: The total investment value remains the same at ₹20,000 (₹200 × 100 shares or ₹50 × 400 shares).


Example 2: 5:1 Bonus Issue

In a 5:1 bonus issue, shareholders receive five additional shares for every one share they currently hold.

      A. Scenario:
            Shares Owned Before Bonus: 100 shares
            Bonus Ratio: 5:1

      B. Calculation:
            Bonus Shares Received: 100 shares × 5 = 500 shares
            Total Shares After Bonus: 100 original shares + 500 bonus shares = 600 shares

      C. Impact on Share Price:
            If the share price before the bonus issue was ₹300, the post-bonus share price would adjust to:
            New Share Price: (₹300 × 100 shares) / 600 shares = ₹50 per share

Note: The total investment value remains the same at ₹30,000 (₹300 × 100 shares or ₹50 × 600 shares).

Key Points to Remember

      Proportional Adjustment: While the number of shares increases, the share price adjusts so that the overall value of the investment remains unchanged.

      Enhanced Liquidity: Bonus issues often lead to increased liquidity in the stock, making it more accessible to a broader range of investors.

      Investor Perception: Such corporate actions can signal the company's confidence in its future prospects, potentially boosting investor sentiment.

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