Bonus issue

Indian Economy glossary

Also called: Bonus shares · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A bonus issue (also called bonus shares) means a company gives free extra shares to its existing shareholders. It does this by turning part of its reserves (profits kept back from earlier years) into share capital.

It matters because it raises no new money. It is only an accounting entry inside the company. The share price falls in the same proportion, so each shareholder's total wealth stays the same. UPSC often tests it against the stock split.

Price after a bonus (approximately) = Price before × Old number of shares ÷ (Old shares + Bonus shares)

Explanation

How it works

The board announces a bonus ratio. For example, 1:1 means 1 free share for every 1 share held.
Inside the company (the accounting entry):
Reserves go down.
Share capital goes up by the same amount.
Net worth (total shareholders' funds = share capital + reserves) does not change. Money only moves from one part of the balance sheet to another.
Face value (the value printed on the share, for example ₹10) stays the same. There are simply more shares of the same face value.
No cash comes in and no cash goes out. So a bonus issue is not a way to raise funds.

What happens to the shareholder

The share price falls in the same proportion as the new shares:
more shares → each share is a smaller slice of the same company → the market price per share falls.
Worked example (1:1 bonus):
Before: 100 shares × ₹1,000 = ₹1,00,000.
After: 200 shares × about ₹500 = still ₹1,00,000.
Wealth is unchanged. Only the number of shares and the price per share have changed.
Earnings per share (EPS) (net profit ÷ number of shares) falls, because the same profit is now spread over more shares. This is the opposite of a buyback, where EPS rises.
Link to dividends: a dividend in % terms is calculated on face value, not on market price. Face value does not change, so if the company keeps the same dividend % after a bonus, the shareholder receives more cash in total because they now hold more shares.

Why companies do it

Signal of confidence: only a company with large reserves can turn them into capital. The market often reads this as good news.
Lower price per share: small investors can buy the share more easily.
More trading: more shares in the market means more buying and selling. This improves liquidity (how easily a share can be bought or sold without moving its price much).
Rewards shareholders without paying out cash: the cash stays inside the business. A dividend or a buyback, by contrast, sends cash out.

Where it fits among corporate actions

A corporate action is a decision by a listed company that changes what its shareholders own or receive.
There are five key ones: dividend, bonus issue, stock split, buyback, delisting.
Only a dividend and a buyback send cash out of the company. A bonus issue and a stock split only change the number of shares.

In India

Regulator: SEBI (Securities and Exchange Board of India) oversees corporate actions by listed companies.
Disclosure duty: under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), listed companies must disclose material events (big news that can move the share price). A bonus announcement is such news, so all investors must get it at the same time.
Insider trading risk: news of a bonus before it is announced is price-sensitive. If an insider trades on it, that can be insider trading under the SEBI PIT (Prohibition of Insider Trading) Regulations, 2015.
Tool for minimum public shareholding (MPS):
MPS means at least 25% of a listed company's shares must be held by the public (non-promoters), under SCRR 1957, rule 19A.
SEBI's list of approved ways to reach MPS includes a rights or bonus issue to the public only, with promoters giving up their share of it [1].
Only public shareholders receive new shares, so the public's share of the company goes up.

Don't confuse with

Stock split: in a split, face value falls (for example, ₹10 becomes ₹2) and share capital and reserves do not change. In a bonus issue, face value stays the same, reserves fall and share capital rises. Neither raises new money.
Rights issue: new shares are offered to existing shareholders, but they must pay for them, so the company raises fresh money. Bonus shares are free and raise nothing.
Dividend: a dividend pays cash out of profit. A bonus gives shares, and no cash leaves the company.
Buyback: a buyback reduces the number of shares, sends cash out and raises EPS. A bonus increases the number of shares, sends no cash out and lowers EPS.

Prelims Hooks

A bonus issue raises no new money. Reserves are converted into share capital.
After a bonus issue, face value does not change and share capital rises. After a stock split, face value falls and share capital does not change.
The share price falls in proportion to the bonus. In a 1:1 bonus, 100 shares at ₹1,000 become 200 shares at about ₹500, and total value stays the same.
Of the five corporate actions, only dividend and buyback send cash out. Bonus and split change only the number of shares.
A bonus issue to the public only is one of SEBI's approved ways to reach the 25% minimum public shareholding under SCRR 1957, rule 19A [1].
Trap: "A bonus issue increases the company's net worth" is wrong. Net worth is unchanged, because only its make-up changes.

Mains Points

Signal versus substance (GS-III):
A bonus issue creates no new value. Shareholder wealth and company net worth stay the same.
Its real effects are indirect: it signals confidence, lowers the price per share for retail investors and improves liquidity.
Investors should read it as a signal, not as a gain. This point is useful when writing on retail participation in markets and investor education against hype and pump-and-dump schemes.
Ways of rewarding shareholders:
A company can reward shareholders through a dividend or a buyback (cash out) or a bonus issue (shares, with the cash kept inside the business).
A bonus lets a growing firm keep funds for investment while still rewarding owners.
This links to the tax-neutrality debate: after buyback proceeds were taxed like dividends from October 2024, firms have less tax reason to prefer one payout method over another.
Market integrity:
Because a bonus announcement moves the share price, its timing is sensitive.
LODR 2015 requires disclosure to everyone at the same time, and PIT 2015 stops insiders from trading early on this news. Together they protect equal access to information and household trust in the stock market.

Related concepts

Corporate actions, listing obligations and market integrity

Sources

1SEBI circular — Manner of achieving minimum public shareholding (Feb 2023)sebi.gov.in · tier 1