What is a Bonus issue?
- A bonus issue is the distribution of free shares by the company to the existing shareholders. A company may decide to distribute additional shares as an alternative to dividend payout. In a bonus issue, the number of shares increases, but the value of the investment remains the same.
Example scenario
- Mr A holds 100 shares of a company at ₹10 each. If that company announces a 2:1 bonus, that is, for every one share, the shareholder will receive two shares for free, Mr A will receive 200 shares for the 100 shares held in the demat account, and the total holdings of Mr A will be 300 shares. However, the investment value will remain the same.
- Value of investment before Bonus issue: 100 × 10 = 1000₹
- Value of investment after Bonus issue: 300 × 3.33(300/1000) = 1000₹
- Shares must be purchased before the ex-date to be eligible for a bonus.