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, a company may give one bonus share for every five shares held.
- 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.
- They 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.
- A bonus share issue is funded by the company's healthy profits reflected in its annual or quarterly results or from its share reserves.
- The issuance of bonus shares is not taxable; however, shareholders must still pay capital gains taxif 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.
Stock Split v/s Bonus Issue:
- Most people mistake stock splits for bonus concerns. This is due to the fact that, similar to stock splits, bonus issues can result in a rise in the company's share count.
- In contrast to a stock split, where the face value of each share is decreased, a bonus issue offers existing owners more shares at no cost in proportion to the shares they now possess in the company.
- Therefore, bonus shares raise the company's share capital while a stock split keeps it constant.
- However, in both scenarios, the number of shares rises and the share price falls accordingly.
