A Bonus Issue (also called a scrip issue or capitalisation of reserves) is when a company issues free additional shares to its existing shareholders, in proportion to their current holdings.
Instead of paying cash dividends, the company rewards shareholders with extra shares.
This does not bring new funds into the company.
It is done by converting the company’s reserves/profits into share capital.
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Nature of Bonus Issue
1. It is not a source of raising fresh funds.
2. It is simply a book adjustment – reserves are converted into share capital.
3. It increases the number of shares held by shareholders, but does not change their overall ownership %.
4. It is a non-cash distribution of profits.
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Characteristics
1. Proportional Distribution: Issued in a fixed ratio (e.g., 1:2 means one bonus share for every two shares held).
2. No Extra Payment: Shareholders don’t pay anything.
3. From Reserves: Issued from free reserves, securities premium, or capital redemption reserves.
4. No Dilution of Ownership: Shareholding pattern remains the same.
5. Increases Share Capital: Paid-up share capital rises, while reserves decrease.
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Features
1. Increases the number of outstanding shares.
2. Reduces the earnings per share (EPS), since profit is now divided among more shares.
3. Market price per share usually adjusts downward after the bonus issue, but total value of holdings remains the same.
Improves liquidity since more shares are available in the market.
Share price becomes affordable after adjustment, attracting new investors.
For Company:
Rewards shareholders without cash outflow.
Signals strong financial health and profitability.
Helps in conserving cash for expansion or debt repayment.
May increase investor confidence and goodwill.
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Disadvantages of Bonus Issue
For Shareholders:
No actual cash benefit (unlike dividends).
EPS (Earnings per Share) decreases.
Market price per share falls proportionately after issue.
For Company:
Reduces reserves available for future use.
After frequent bonus issues, investors may expect them regularly.
Doesn’t bring in fresh capital (unlike a rights issue).
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Example of Bonus Issue (Numerical)
Suppose ABC Ltd. announces a bonus issue in the ratio 1:2.
A shareholder holding 200 shares will get:
Bonus = (200 ÷ 2) = 100 shares free.
Now, total holding = 200 + 100 = 300 shares.
If the market price before bonus = ₹300 per share,
Total value = 200 × ₹300 = ₹60,000.
After bonus, price adjusts to around ₹200 (theoretically).
New value = 300 × ₹200 = ₹60,000.
So, shareholder’s wealth remains the same initially, but they now hold more shares.
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Real-Life Example (India)
Tata Consultancy Services (TCS): In 2018, TCS declared a 1:1 bonus issue (one free share for each share held).
Infosys: Has declared multiple bonus issues in past decades (last in 2018, 1:1 ratio).
Wipro: Issued bonus shares 12 times since listing – one of the most frequent bonus givers in India.
These companies used bonus issues to reward shareholders while retaining cash for business growth.
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✅ In short:
A bonus issue is a “thank you” gesture from a company to its shareholders, giving them free shares instead of cash dividends, by converting profits into share capital. It increases the number of shares, reduces share price proportionally, and signals the company’s strong financial health.
