Bonus Issue

A bonus issue (also called a scrip issue or a capitalization issue) is a corporate action where a company issues additional shares to its existing shareholders free of cost, in a predetermined ratio such as 1:1, 2:1, etc. The shares are allotted out of the company's free reserves or securities premium, thereby converting reserves into share capital.

The primary purpose is to reward shareholders, improve marketability of the stock by increasing the number of shares in circulation, and to bring the share price into a more attractive trading range. Because the issue is free, the total market value of a shareholder’s holding remains unchanged immediately after the issue.

In the NISM exam, questions often test your ability to identify the correct ratio, compute the entitlement, and recognise that a bonus issue does not create a cash inflow for the company. Remember that the shareholder’s wealth is preserved; only the number of shares and the per‑share price adjust.

SEBI’s (Securities and Exchange Board of India) Listing Regulations, particularly Regulation 23, prescribe the procedure for a bonus issue. The company must obtain shareholder approval through a special resolution, disclose the proposed ratio, and ensure that the issue is made out of free reserves, securities premium, or capital redemption reserves.

The Board of Directors must pass a resolution specifying the record date, the ratio, and the date of allotment. The record date determines which shareholders are eligible; those on the register as of this date receive the bonus shares.

For the exam, remember the three mandatory conditions: (1) availability of free reserves, (2) shareholder approval, and (3) compliance with the prescribed timeline (record date, ex‑bonus date, and allotment date). Failure to meet any condition invalidates the issue under SEBI rules.

Bonus issues are expressed as a ratio of additional shares to each existing share. Common ratios in India are 1:1 (one extra share for each share held), 2:1, and 3:1. A higher ratio results in a larger increase in the number of shares and a proportionally larger reduction in the market price per share.

Some companies may issue a partial bonus (e.g., 1:2), where shareholders receive one extra share for every two shares held. The entitlement is always calculated on the total number of shares held on the record date, including shares acquired through recent purchases.

Exam questions may present unusual ratios, so always convert the ratio into a decimal multiplier before calculating entitlement. For instance, a 3:2 bonus means each existing share yields 1.5 bonus shares (3/2).

To use the formula, first convert the ratio into a numeric multiplier. A 2:1 bonus translates to a multiplier of 2, while a 3:2 bonus becomes 1.5 (3 ÷ 2). Multiply this multiplier by the number of shares held on the record date to obtain the entitlement.

If the shareholder holds shares in multiple demat accounts, add the holdings across all accounts before applying the formula. The result must be a whole number; any fractional entitlement is usually rounded down as per the company’s prospectus.

Remember that the entitlement is independent of the market price; the calculation only uses share count and the announced ratio, which is a frequent point of focus in NISM multiple‑choice questions.

When bonus shares are issued, the company’s share capital increases because the free reserves are transferred to the equity section. The total paid‑up capital rises proportionally to the number of new shares issued.

Simultaneously, the market adjusts the share price to reflect the larger share base. The adjustment is roughly inverse to the bonus ratio. For a 1:1 bonus, the price typically halves; for a 2:1 bonus, it drops to about one‑third. This price adjustment occurs on the ex‑bonus date, the first trading day when the bonus shares are not yet reflected in the shareholder’s entitlement.

From an accounting perspective, the journal entry debits free reserves and credits share capital (and possibly share premium). The exam may ask you to identify the correct ledger entries or the impact on the balance sheet.

Bonus shares are not treated as a taxable event at the time of receipt because no cash is received. The cost of acquisition for tax purposes is considered to be zero, and the holding period for capital gains tax begins on the date of allotment.

When the investor eventually sells the bonus shares, the capital gains are calculated based on the sale price minus the deemed cost (which is zero). Consequently, the entire sale proceeds are subject to capital gains tax, and the holding period (short‑term or long‑term) follows the usual 12‑month rule for listed equities.

Exam candidates often confuse the taxability of bonus shares with that of a rights issue. Remember: rights issue proceeds are taxable (as part of the purchase price), while bonus shares are not taxable at receipt.

The company announces the bonus issue through a public notice, specifying the record date, the ex‑bonus date, and the ratio. The record date is the cut‑off for determining eligibility; shareholders on the register at the close of business on this date receive the bonus shares.

The ex‑bonus date is usually one business day before the record date. On the ex‑bonus date, the share price reflects the anticipated adjustment, and trades settle without the bonus entitlement.

For exam purposes, be able to sequence the dates correctly: Announcement → Record Date → Ex‑Bonus Date → Allotment Date. Mis‑ordering these dates is a frequent source of errors in multiple‑choice questions.

While a bonus issue, a stock split, and a rights issue all increase the number of shares, they differ in purpose and financial effect. A bonus issue capitalises reserves, a stock split merely changes the face value without affecting reserves, and a rights issue raises fresh capital from shareholders.

In a stock split, the total market value remains unchanged, and no accounting entry is required because the share capital is simply re‑valued. In a rights issue, shareholders must pay for the new shares, leading to an inflow of cash and a potential dilution of earnings per share if the issue is under‑subscribed.

Exam takers should remember: Bonus – free shares from reserves; Split – change in face value only; Rights – paid subscription for new capital.