What is a Bonus Issue?
A bonus issue (also called a scrip dividend or capitalization issue) is when a company issues free additional shares to existing shareholders in a fixed ratio. No money changes hands — the company converts its retained earnings or free reserves into equity share capital.
Unlike a stock split (which divides existing shares), a bonus issue creates new shares from the company's reserves. The practical effect for shareholders is similar, but the accounting treatment is different.
Bonus Ratio Explained
The notation works as follows:
- 1:1 bonus: For every 1 share you hold, receive 1 additional free share. Your holdings double.
- 2:1 bonus: For every 1 share, receive 2 additional shares. Holdings triple.
- 3:2 bonus: For every 2 shares, receive 3 additional. Holdings increase 2.5×.
Example: Hold 100 shares at ₹300 each (total ₹30,000). Company announces 1:1 bonus. After bonus: 200 shares at ₹150 each (total ₹30,000). Same total value — more shares at a lower price per share.
Where Do Bonus Shares Come From?
Bonus shares come from the company's free reserves and retained earnings — accumulated profits that have not been distributed as dividends. When a company issues a bonus, it reduces its free reserves and increases its paid-up share capital by the same amount. No cash leaves the company.
This is why bonus issues signal that a company has strong reserves — it can only issue bonus shares if it has sufficient free reserves to capitalize.
Key Dates
- Board announcement date: Board approves bonus. Share price often jumps on this news.
- Record date: Must hold shares on this date to receive bonus shares.
- Ex-bonus date: Price adjusts downward on this date. Shares bought on or after ex-date do not receive bonus.
- Allotment date: New bonus shares are allotted and credited to demat accounts (typically 15 days after record date).
Why Companies Issue Bonus Shares
- Reward loyal shareholders: Creates goodwill without cash outflow. Shareholders receive tangible benefit.
- Signal financial strength: Only companies with strong reserves can issue bonuses. It's a positive signal about earnings quality.
- Improve liquidity: More shares in circulation → more daily volume → better price discovery.
- Reduce per-share price: Makes the stock more accessible to retail investors, similar to a split.
Bonus vs Dividend — Key Differences
- Form: Bonus = additional shares. Dividend = cash payment.
- Cash flow: Bonus requires no cash from company. Dividend requires actual cash outflow.
- Tax: Dividend is taxable as income at slab rate immediately. Bonus shares are not taxed at receipt — tax only applies when you sell them (as capital gains).
- Signal: Bonus signals strong reserves. Dividend signals strong cash generation.
Tax on Bonus Shares
The cost of acquisition for bonus shares is considered ₹0 (since you paid nothing for them). This means when you sell bonus shares, the entire sale price is your capital gain.
- Holding period for bonus shares: Counted from the date bonus shares are credited to your demat account.
- If held more than 12 months: LTCG at 12.5% on gains above ₹1.25 lakh/year.
- If held 12 months or less: STCG at 20%.
This means selling bonus shares in the same year they're credited results in significantly higher tax than holding for 12+ months.
Bonus vs Stock Split
- Bonus creates new shares from reserves (reserves reduce, share capital increases).
- Stock split divides existing shares (no change to reserves or capital).
- Face value: Stays the same in a bonus issue. Changes in a stock split.
- Both result in more shares at a lower price per share — effect on shareholders is similar.