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Bonus Issue

Investment

Bonus Share Issue

Free additional shares given to existing shareholders in proportion to their current holding, funded from the company's reserves. A bonus issue increases the number of shares outstanding but does not change the company's total value — the share price adjusts proportionally.

Definition

A bonus issue (or bonus shares) is the allotment of additional free shares to existing shareholders by a company, funded from its accumulated reserves and surpluses. The ratio of bonus shares to existing holdings is specified by the company — for example, a 1:2 bonus means 1 free share for every 2 shares held.

Bonus shares are funded by converting the company's free reserves (retained profits) into share capital — a bookkeeping entry with no cash leaving the company and no new money entering. The total value of the company remains unchanged immediately after the bonus; the higher share count is offset by a proportionally lower share price.

Bonus issues are seen as a positive signal when a company has strong, consistent earnings and the confidence to permanently capitalise those reserves into share capital.

Formula

New Shares Received = Existing Shares × (Bonus Ratio)

Post-Bonus Share Price = Pre-Bonus Price / (1 + Bonus Ratio)

For a 1:2 bonus (1 new share for every 2 held):

  • New shares = Existing / 2
  • Post-bonus price = Pre-bonus price × (2/3)

For a 1:1 bonus (1 new share for every 1 held):

  • New shares = Existing
  • Post-bonus price = Pre-bonus price / 2

Worked Example

You hold 300 shares of ABC Ltd at ₹600 each = Total value: ₹1,80,000

The company announces a 1:2 bonus (1 bonus share for every 2 held).

  • Bonus shares received = 300 / 2 = 150 shares
  • New total shares = 300 + 150 = 450 shares
  • Post-bonus adjusted price = ₹600 × (300/450) = ₹400
  • New total value = 450 × ₹400 = ₹1,80,000 (unchanged)

6 months later, the stock recovers to ₹580. Your value = 450 × ₹580 = ₹2,61,000 — growth of ₹81,000. This growth came from the company's performance, not the bonus issue itself.

Tax note: The 150 bonus shares have zero acquisition cost. If sold after 1 year, all ₹580 per share is LTCG (taxed at 12.5% above ₹1.25L threshold).

Key Things to Know

  • Bonus ≠ wealth creation on announcement day: On the ex-date, the NSE/BSE automatically adjusts the price downward. Your pre-bonus wealth and post-bonus wealth are equal. Wealth creation requires the stock to appreciate after the bonus, driven by earnings growth.
  • Improved liquidity: After a bonus, the lower per-share price often improves trading liquidity — more retail investors can buy in smaller quantities. This can occasionally lead to modest price discovery improvement, but it's not guaranteed.
  • Book value impact: A bonus issue converts reserves to share capital — reserves decrease, share capital increases. Total shareholders' equity is unchanged. Book value per share decreases (same equity, more shares), as does P/E ratio (same earnings, more shares → lower EPS). Both are arithmetic effects, not economic value changes.
  • Zero cost basis for taxation: This is the most important practical implication for investors. When you sell bonus shares (at any price), the entire sale proceeds are your capital gain since the acquisition cost is ₹0 per IT rules. Long-term gains on bonus shares are particularly tax-efficient when harvested in years where you have less than ₹1.25 lakh of other equity gains.
  • Vs rights issue: A bonus issue costs you nothing and reduces liquidity by using reserves. A rights issue requires you to pay money and brings fresh capital into the company. A company announcing bonus issues is signalling strength (we have surplus reserves to convert); a rights issue may or may not signal the same.

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Related Terms

Rights IssueRights Issue of SharesBook ValueBook Value per ShareP/E RatioPrice-to-Earnings RatioDividend YieldAnnual Dividend Yield
Frequently Asked Questions
Does a bonus issue increase my wealth?
No — not immediately. A bonus issue increases the number of shares you hold but the price adjusts proportionally, leaving your total investment value unchanged. A 1:1 bonus means you have twice as many shares at half the price. The wealth increase comes from the stock's future price performance, which is unrelated to the bonus itself.
Why do companies announce bonus issues?
Companies typically announce bonus issues to: signal confidence in future earnings (rewarding shareholders with their accumulated reserves), improve share liquidity by reducing the per-share price (more affordable for retail investors), and retain cash while still 'rewarding' shareholders. A bonus issue from a company with strong reserves and earnings growth is a positive signal.
What is the tax treatment of bonus shares in India?
Bonus shares are received tax-free. However, they have a zero cost of acquisition for capital gains purposes (as per the Income Tax Act). When you sell bonus shares: if held over 1 year, gains are LTCG taxed at 12.5% (above ₹1.25L exemption). If held under 1 year, STCG at 20%. The full sale price is the capital gain since the acquisition cost is zero.
What is the record date for a bonus issue?
The record date is the date by which you must hold shares to be eligible for the bonus. The ex-bonus date is usually one business day before the record date (for T+1 settlement). If you buy shares on or after the ex-bonus date, you are not entitled to the bonus shares. The bonus shares are credited to your demat account within 2–15 business days of the record date.
How does a bonus issue differ from a stock split?
Both increase the number of shares and proportionally reduce the share price. The key accounting difference: a bonus issue converts reserves into paid-up capital (reserves decrease, share capital increases on the balance sheet). A stock split just changes the face value — no transfer between reserves and capital. The economic effect on shareholders is identical.