A bonus issue is essentially a stock dividend. It is a way for a company to reward its shareholders by allotting additional shares. These bonus shares are issued from the company’s reserves and are provided free of cost to shareholders, based on the shares they already hold. The allotments are typically made in a fixed ratio, such as 1:1, 2:1, or 3:1.
For instance, a 2:1 bonus ratio means that existing shareholders (as of the record date) will receive 2 additional shares for every 1 share they hold, at no cost. A shareholder holding 100 shares would receive an additional 200 shares, increasing their total holdings to 300 shares.
When a bonus issue occurs, the number of shares held by shareholders increases, but the overall value of their investment remains the same. Consequently, the price per share is adjusted downward in proportion to the bonus ratio.
Let’s take an illustration:
| Bonus Issue | No of shares held before bonus | Share price before Bonus issue | Value of Investment | Number of shares held after Bonus | Share price after Bonus issue | Value of Investment |
|---|---|---|---|---|---|---|
| 1:1 | 200 | 50 | 10,000 | 400 | 25.0 | 10,000 |
| 2:1 | 20 | 200 | 4,000 | 60 | 66.7 | 4,000 |
| 4:1 | 1000 | 20 | 20,000 | 5,000 | 4.0 | 20,000 |
Companies generally issue bonus shares to encourage greater participation from retail investors, especially when the company’s share price has risen significantly, making it difficult for new investors to enter. A bonus issue reduces the share price by increasing the number of outstanding shares while keeping the aggregate value of the investment unchanged, thereby making the stock more affordable.
