What Is a Bonus Issue and how does it work?

Disclaimer:-Investments in the securities market are subject to market risks. This content is for Educational purposes only and does not constitute financial advice.

A bonus issue refers to the distribution of free shares by a company to its existing shareholders. Instead of paying out dividends in cash, a company may choose to reward shareholders with additional shares. While the total number of shares held by an investor increases, the overall value of their investment remains unchanged.

How Does a Bonus Issue Work?

When a company announces a bonus issue, the existing shareholders receive additional shares in a specified ratio, such as 2:1 or 1:1. For instance, in a 2:1 bonus issue, shareholders receive two additional shares for every one share they hold.

Although the number of shares increases, the market adjusts the share price proportionally, keeping the total value of the investment unchanged.

Example: Understanding the Bonus Issue

Let’s consider an example to explain how a bonus issue impacts an investor’s holdings:

Scenario:

• Mr. A holds 100 shares of a company at ₹10 per share.
• The company announces a 2:1 bonus issue, meaning Mr. A will receive 2 additional shares for every 1 share he holds.

After the bonus issue:

• New shares allotted: 100 × 2 = 200 shares.
• Total shares held by Mr. A: 100 (original shares) + 200 (bonus shares) = 300 Total shares.
• Investment value remains unchanged:

Before the bonus issue:
Value = 100 shares × ₹10 = ₹1,000

After the bonus issue:
Value = 300 shares × ₹3.33 (adjusted price per share) = ₹1,000

The adjusted share price is calculated as:
₹1,000 (original investment value) ÷ 300 shares = ₹3.33 per share.

Eligibility for Bonus Shares

To be eligible for bonus shares, shareholders must purchase shares before the ex-date, which is the cut-off date set by the company. Investors buying shares on or after the ex-date are not entitled to the bonus shares.

Key Takeaways

• A bonus issue increases the number of shares held by existing shareholders.
• The investment value remains the same, as the market price of the shares is adjusted proportionally.
• Shareholders must own shares before the ex-date to qualify for the bonus issue.

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