Bonus Issue
A bonus issue (or scrip issue) is a corporate action where a company distributes additional shares to existing shareholders free of cost, funded from its reserves and surplus, in a specified ratio to existing holdings.
In a bonus issue, the company capitalises part of its free reserves by converting them into paid-up share capital. For example, a 1:1 bonus issue doubles the number of shares outstanding, and the face value component is funded from reserves. Shareholders receive one additional share for every share held, with no cash payment required on their part.
Bonus issues in India have historically been well-received by retail investors, often causing the stock to rise in anticipation of the announcement. Companies like Infosys, Wipro, and HDFC Bank issued multiple rounds of bonuses over the years, partly reflecting the accumulation of large retained earnings and partly as a gesture to reward long-standing shareholders. The increase in the number of shares in circulation typically improves market liquidity and trading volumes.
However, like stock splits, bonus issues do not alter the fundamental economics of the company. Market capitalisation remains unchanged immediately after a bonus (assuming no price reaction), as the share price adjusts downward in proportion to the bonus ratio. The company's earnings, assets, and growth prospects are identical before and after the bonus. Investors who bought shares specifically in anticipation of a bonus announcement and expected to profit from the event were often disappointed if the price fully adjusted.
A crucial tax implication for Indian investors: the cost of acquisition of bonus shares is considered zero for capital gains tax purposes. This means when bonus shares are eventually sold, the entire sale proceeds are treated as capital gains. For long-term holdings where bonus shares have appreciated significantly, this zero cost basis results in a substantial LTCG (Long Term Capital Gains) tax liability. The Finance Act of 2018 reintroduced LTCG tax on equity at 10% above ₹1 lakh, making this more relevant for investors with large bonus share positions.
The announcement of a bonus issue also requires SEBI filing under LODR (Listing Obligations and Disclosure Requirements) regulations, and the record date must be announced at least 15 days in advance. Both the pre-bonus and post-bonus share price history is adjusted retroactively by stock exchanges for chart-based analysis, which ensures historical price data is on a comparable per-share basis.