Difference Between Bonus Share And Stock Split

Bonus shares and stock splits are corporate actions taken by companies that affect the number of outstanding shares. While both involve an increase in the number of shares held by shareholders, there are significant differences between the two in terms of their purpose, impact on share capital, and overall implications for investors.

Understanding the distinction between bonus shares and stock splits is crucial for making informed investment decisions.

What is a Bonus Share?

A bonus share, also known as a bonus issue or a stock dividend, is a corporate action in which a company distributes additional shares to its existing shareholders at no extra cost. The number of bonus shares allocated to each shareholder is typically proportional to their current shareholding.

For example, in a 1:1 bonus issue, shareholders would receive one additional share for every share they currently hold.

The primary purpose of a bonus issue is to reward existing shareholders by increasing their ownership stake without requiring them to invest additional funds. It is generally considered a positive signal indicating the company's strong financial performance and its ability to capitalize on its reserves.

What is a Stock Split?

A stock split is a corporate action in which a company increases the number of outstanding shares by dividing each existing share into multiple shares. The split ratio determines the number of additional shares received by shareholders.

For instance, in a 2-for-1 stock split, each shareholder would receive one additional share for every share they hold, effectively doubling the number of shares owned while reducing the share price proportionately.

The primary objective of a stock split is to make the company's shares more affordable and accessible to a broader range of investors. By reducing the share price, the company aims to improve the liquidity and trading volume of its stock.

Impact on Share Price

• Bonus Share: When a company issues bonus shares, the market value of the existing shares is divided among the increased number of shares. As a result, the share price decreases proportionately. However, the total market capitalization of the company remains unchanged.
  
• Stock Split: Similarly, in a stock split, the share price is adjusted downward in proportion to the split ratio. For example, if a company's stock is trading at ₹100 per share and it announces a 2-for-1 split, the share price would be halved to ₹50 per share.

Impact on Company's Equity

• Bonus Share: A bonus issue involves transferring funds from the company's reserves or retained earnings to the share capital account. This increases the total number of shares outstanding, but the company's overall equity remains unchanged.
  
• Stock Split: In contrast, a stock split does not affect the company's equity or share capital. It simply increases the number of outstanding shares while proportionately reducing the share price and par value (if applicable).

Bonus Shares Vs Stock Splits - What is the Difference?

Another scenario also allows investors to increase their shares without additional cost. A stock split implies a situation when a company gives its shareholders more shares by splitting each share.

In other words, during a split, the total amount of shares rises, whereas the price for one share correspondingly goes down. This makes the stock more accessible and its liquidity rises; therefore, it attracts more investors.

For example, in a 2-for-1 split, every existing share is replaced by two new shares. The price per share would be reduced by half, while the number of shares the owner previously possessed would be doubled.

Even though the share price and number change, the company's total market capitalisation remains unchanged; so does the overall value of an investment for each shareholder right after a split. For tax purposes, the cost basis of the shares is adjusted by the split ratio, but a stock split itself does not have any immediate tax implications. Stock splits in India have often been seen as a good sign for growth and performance within companies, making shares more accessible to potential investors. Here is how bonus shares differ from stock splits:

Bonus Share and Split Share - Calculation with Examples

Example 1:

Bonus Share Calculation (Infosys Ltd. - 2022)

In August 2022, Infosys Ltd. announced a 1:1 bonus issue to mark its 25th year in the public market.

Before the bonus issue:

• Number of shares held by an investor = 1,000
• Market price per share = ₹1,500
• Total market value = 1,000 x ₹1,500 = ₹15,00,000

After the 1:1 bonus issue:

• Number of shares held = 1,000 + 1,000 (bonus shares) = 2,000
• Market price per share (adjusted) = ₹1,500 / 2 = ₹750
• Total market value = 2,000 x ₹750 = ₹15,00,000 (unchanged)

Example 2:

Stock Split Calculation (Reliance Industries Ltd. - 2017)

In September 2017, Reliance Industries Ltd. (RIL) announced a 1:1 stock split.

Before the stock split:

• Number of shares held = 1,000
• Market price per share = ₹1,600
• Total market value = 1,000 x ₹1,600 = ₹16,00,000  

After the 1:1 stock split:

• Number of shares held = 1,000 x 2 = 2,000
• Market price per share (adjusted) = ₹1,600 / 2 = ₹800
• Total market value = 2,000 x ₹800 = ₹16,00,000 (unchanged)
  

Common Misconceptions

When it comes to corporate actions like bonus shares and stock splits, prevailing misconceptions can lead to misunderstandings. Let's address a few important ones to separate fact from fiction:

Tax Implications

In India, bonus shares and stock splits are generally not taxable events for investors. However, there are certain tax implications to consider:

As a rule of thumb, always consult a qualified tax professional for specific guidance on tax implications based on your circumstances, as tax laws and regulations may change over time.

Comparative Analysis: Benefits and Drawbacks

While bonus shares and stock splits share some similarities, they also have distinct benefits and drawbacks from an investor's perspective. Knowing them can help investors make informed decisions based on their investment goals and risk tolerance. Here's a comparative analysis:

Bonus Shares:

Stock Splits:

Conclusion

While both bonus shares and stock splits result in an increase in the number of outstanding shares, their purposes and mechanisms differ. A bonus issue rewards existing shareholders by capitalizing on the company's reserves, while a stock split aims to make the shares more affordable and improve liquidity.

Investors must understand the implications of these corporate actions and how they affect the company's equity, share price, and overall market capitalization. By analyzing the differences between bonus shares and stock splits, investors can make informed decisions and align their investment strategies with their financial goals and risk tolerance.

Remember, neither a bonus issue nor a stock split directly impacts the company's underlying value or an investor's overall shareholding. However, they can influence market sentiment, trading activity, and the accessibility of the stock to different investor segments.