What Are Bonus Shares?
Bonus shares—sometimes called “free shares”—are extra shares a company gives to its existing shareholders without any cost. Think of it like getting bonus points in a video game. If you own shares in a company, it rewards you by handing out extra shares based on a fixed ratio. For instance, in a 1:1 bonus issue, you get one extra share for every share you already have.
- Why Companies Do It
- Rewarding Shareholders: Companies use bonus shares to thank long-term investors.
- Improving Liquidity: By increasing the total shares available, each share’s price usually drops, making them more affordable to small investors.
- Signaling Confidence: Issuing bonus shares often shows that the company has healthy profits and strong cash reserves, which can boost investor confidence.
How Do Bonus Shares Work?
- Board Approval & Record Date
First, the company’s board decides on a bonus ratio (like 1:1 or 2:1) and asks shareholders to approve it. Then they set a “record date.” Anyone who owns shares on that date will get the bonus shares. - Ex-Bonus Date Adjustment
On the “ex-bonus” date (the first trading day after the record date), the share price automatically adjusts downward to reflect the extra shares. However, the total value of your investment remains almost the same—only the number of shares changes. - Accounting Side
Suppose Company A has 1 million shares at a ₹100-par value and wants to issue a 1:1 bonus. They move ₹1 crore from their reserves into share capital. After the bonus:- Total shares = 2 million
- Par value per share = ₹100
- Reserves decrease by ₹1 crore
A Simple Number Example
Imagine you own 100 shares of Company XYZ, each worth ₹200. If XYZ declares a 1:1 bonus:
- Before Bonus:
- Shares you own: 100
- Price per share: ₹200
- Total value: 100 × ₹200 = ₹20,000
- After Bonus (Ex-Bonus Day):
- Shares you own: 200 (100 original + 100 bonus)
- Theoretical price: ₹200 ÷ 2 = ₹100
- Total value: 200 × ₹100 = ₹20,000
In theory, your total investment value stays the same immediately after the bonus. In reality, market forces may push the price up or down slightly.
Real-Life Examples
1. TCS (Tata Consultancy Services)
- Bonus Ratio: 1:1
- Effective Date: June 4, 2018
- Before Bonus: Closing price ~ ₹3,350
- Ex-Bonus Price (Theoretical): ₹3,350 ÷ 2 = ₹1,675
- Actual Trading Range (Post-Bonus): ₹1,690–₹1,750
TCS repeated similar bonus issues in 2006 (1:1) and 2009 (1:1). These moves rewarded shareholders while keeping the market cap roughly stable.
2. Hypothetical Company ABC (2:1 Bonus)
| Date | Shares Outstanding | Closing Price (₹) | Event | Total Market Cap (₹) |
|---|---|---|---|---|
| Jan 31, 2023 | 500,000 | 150 | Before Record Date | 75,000,000 |
| Feb 01, 2023 | 1,500,000 | 50 (≈150 ÷ 3) | Ex-Bonus (2:1) | 75,000,000 |
| Feb 02–05, 2023 | 1,500,000 | 52–58 | Market Adjustment Period | 78,000,000–87,000,000 |
In a 2:1 bonus, shareholders get two extra shares for each share they own. So, 500,000 shares become 1.5 million shares. The price falls to about one-third of the pre-bonus price, keeping market cap nearly the same.
Why Timing and Ratios Matter
- Accumulated Reserves vs. Paid-Up Capital
Companies often issue bonus shares when their retained earnings or other reserves become large compared to the paid-up capital. Converting some of those reserves into share capital brings the balance sheet into better shape. - Psychological Impact
Retail investors sometimes view a lower per-share price (after a bonus) as more “affordable,” which can lead to increased buying interest—even though the total investment value hasn’t changed at the moment of issue. - Market Sentiment
Although the theoretical formula is simple (Pre-bonus price ÷ (1 + bonus ratio)), actual market prices can drift. If investor confidence is high, the stock may trade above the theoretical ex-bonus price. Conversely, it might dip below on broader market weakness.
Things to Keep in Mind
- Tax Considerations
In many countries, you’re not taxed when you receive bonus shares. But when you eventually sell, your cost basis (for capital gains tax) should be adjusted to reflect the bonus ratio. Always check local tax rules or consult a tax advisor. - Fractional Shares
If the bonus ratio doesn’t match your total shareholding exactly (e.g., a 3:2 bonus when you own 5 shares), companies usually pay you cash for any fraction, based on the ex-bonus price. - Value Remains “Same”—Initially
Even though you get more shares, the share price drops proportionally. Your total holding’s value (shares × price) remains about equal right after the bonus.
How to Track Future Bonus Declarations
- Bombay Stock Exchange (BSE) – Corporate Actions
https://www.bseindia.com/corporates/CorporatesActions.aspx - National Stock Exchange (NSE) – Corporate Filings
https://www.nseindia.com/corporates/corporate-actions - Securities and Exchange Board of India (SEBI) – Guidelines on Bonus Issues
https://www.sebi.gov.in/legal/circulars/2021/guidelines-on-bonus-issue.html - Investopedia – “Bonus Issue (Bonus Share)”
https://www.investopedia.com/terms/b/bonus_issue.asp
Checking these sites regularly helps you spot upcoming bonus dates, record dates, and ex-bonus dates, so you won’t miss out on any free shares.
Bringing It All Together
To sum up:
- Bonus shares are extra shares given free to existing shareholders in a fixed ratio.
- Your share count goes up but the share price drops proportionally, so your overall value stays about the same on the ex-bonus date.
- Companies use bonus shares to reward investors, improve liquidity, and signal strong financials.
- Real-world examples (like TCS’s 1:1 bonuses) show how share prices adjust.
- Always watch for the record date and ex-bonus date, and consult reliable sources (BSE/NSE/SEBI) to stay informed