What is the impact of a bonus issue on equity holdings and F&O positions?
- A bonus issue is the distribution of free shares by the company to eligible shareholders.
- Impact on holdings
- The share price falls in the ratio of the bonus allotment. However, this does not affect the overall value of holdings. Bigul displays the bonus quantity only after they are credited.
Example scenario
- Mr A holds 10 shares of Reliance at ₹1000 each, and the company has announced a bonus issue in the ratio of 2:1. So Mr A will receive 2 bonus shares of Reliance for every share held on the ex-date/record date. Mr A’s holdings will now have 30 shares of Reliance after the bonus issue (10 originally bought + 20 bonus shares).
- In the above example, the share price will drop to ₹333.33 [1000/(2+1)], but this won’t change the value of Mr A’s holdings.
- Value of holdings before bonus: 10 × 1000 = ₹10,000
- Value of holdings after bonus: 30 × 333.33 = ₹10,000
- If a company announces a 1:2 bonus and an investor holds just 1 share, they will get 0.5 shares as a bonus. The 0.5 shares are known as partial bonus shares that are settled in cash, and the funds will be credited to the investor's primary bank account.
- Impact on P&L
- P&L will show an artificial drop until the bonus shares are credited to the demat account. Once the shares are credited, the P&L will be updated. It takes up to 15 days for the bonus shares to be credited. An SMS from CDSL will be sent when the shares are credited.
- Impact on F&O positions
- Option strike prices are divided by the factor of the bonus issue ratio. For a 1:1 issue, the factor is 2. The future and options prices are divided by a factor of 2 to maintain the same contract value as before the bonus issue. The revised lot size is arrived at by multiplying the factor with the current lot size.
- Bonus ratio: 1:1
- Strike price: 100
- Lot size: 500
- Revised lot size: 1000 (i.e., 500×2)
- Revised strike price: 50 (i.e., 100/2)