Bonus issue of shares
Free extra shares out of reserves: more shares, same slice of the company.
A bonus issue is when a company gives existing shareholders extra shares free of cost, in proportion to what they already hold. The company pays for them by moving money from its reserves into share capital, an accounting step called capitalisation of reserves. No cash comes in and none goes out.
Because nothing of value changes hands, the share price falls in line with the bigger share count. A shareholder owns more shares, but the same slice of the same company. A rights issue is different: there, shareholders pay to buy new shares.
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A 1:1 bonus in rupees
Illustrative numbers. Meena holds 100 shares of a listed company trading at ₹800 before the bonus.
Shares Meena holds
Before the bonus
100
After a 1:1 bonus
200 (1 new share for every 1 held)
Market price per share
Before the bonus
₹800
After a 1:1 bonus
About ₹400 (price adjusts on the ex-bonus date)
Value of her holding
Before the bonus
₹80,000
After a 1:1 bonus
About ₹80,000
Her percentage stake
Before the bonus
Unchanged
After a 1:1 bonus
Unchanged
Company's share capital
Before the bonus
Lower
After a 1:1 bonus
Higher, by the face value of the bonus shares
Company's reserves
Before the bonus
Higher
After a 1:1 bonus
Lower, by the same amount
| Before the bonus | After a 1:1 bonus | |
|---|---|---|
| Shares Meena holds | 100 | 200 (1 new share for every 1 held) |
| Market price per share | ₹800 | About ₹400 (price adjusts on the ex-bonus date) |
| Value of her holding | ₹80,000 | About ₹80,000 |
| Her percentage stake | Unchanged | Unchanged |
| Company's share capital | Lower | Higher, by the face value of the bonus shares |
| Company's reserves | Higher | Lower, by the same amount |
Reading a bonus ratio
The ratio is new shares to old shares. In a 1:1 bonus you get 1 new share for every 1 held, so 100 becomes 200. In a 2:1 bonus you get 2 new for every 1 held, so 100 becomes 300. In a 1:2 bonus you get 1 new for every 2 held, so 100 becomes 150.
To find the theoretical price after the bonus, divide the old price by the new share count per old share. At ₹900 with a 2:1 bonus, each old share becomes 3 shares, so the price adjusts to about ₹300. Real prices move with the market from there.
The restrictions in Regulations 294 and 295
- check_circleSources allowed: free reserves, the securities premium account or the capital redemption reserve, built out of genuine profits or premium collected in cash.
- check_circleRevaluation reserves, created by revaluing fixed assets, cannot be capitalised for a bonus.
- check_circleBonus shares cannot be issued in lieu of dividends.
- check_circleShares must be reserved for holders of outstanding compulsorily convertible debt instruments, in proportion to the convertible part, and issued to them on conversion on the same terms.
- check_circleAllotment is in dematerialised form only.
- check_circleDeadline: 15 days from board approval where no shareholder approval is needed; two months from the board meeting where shareholders must approve the capitalisation. The issue counts as implemented on the date trading in the bonus shares begins.
- check_circleOnce announced, a bonus issue cannot be withdrawn.
The trap NISM likes
Options such as 'revaluation reserve', 'bonus in place of the final dividend' or 'the board may withdraw the bonus if the market falls' are all wrong under Regulation 294 and 295. The other common slip is the timeline: 15 days runs from the board's approval, and two months applies only when shareholder approval is required.
How Series IX tests this
Bonus issues sit in the issue management part of the Series IX syllabus. Expect three question types: a ratio calculation (shares after a 3:2 bonus, or the adjusted price), a 'which reserve can be used' question, and a statement question on the timeline or the ban on withdrawal.
In ratio questions, read the order carefully. '3:2' means 3 new shares for every 2 held, so 200 shares become 500, not 333.
FAQs
What is a bonus issue of shares?expand_more
Free extra shares given to existing shareholders in a fixed ratio, paid for by converting the company's reserves into share capital. Your number of shares rises, the price adjusts, and your percentage stake stays the same.
Does a bonus issue increase the value of my holding?expand_more
Not by itself. The price adjusts on the ex-bonus date so that the total value is about the same. What changes is the number of shares and the company's split between share capital and reserves.
What is the difference between a bonus issue and a rights issue?expand_more
Bonus shares are free and need no action from you. Rights shares are offered for a price, and you choose whether to pay, renounce your entitlement or let it lapse.
Can a company issue bonus shares out of revaluation reserves?expand_more
No. Regulation 294(3) of the SEBI ICDR Regulations bars capitalising reserves created by revaluing fixed assets. Only free reserves, the securities premium account or the capital redemption reserve may be used.
How long does a company have to complete a bonus issue?expand_more
15 days from board approval if shareholder approval is not needed, or two months from the board meeting if it is. The issue is complete when trading in the bonus shares begins.
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