Bonus Ratio
The bonus ratio describes the proportion in which a company issues free additional shares to existing shareholders from its accumulated reserves, with common ratios being 1:1 (one bonus share for every share held) or 2:1 (two bonus shares for every share held), resulting in an automatic reduction in the market price per share while leaving total shareholder value unchanged.
A bonus issue — also called a capitalisation issue or scrip issue — is a corporate action by which a company converts a portion of its free reserves, securities premium account, or capital redemption reserve into paid-up equity capital, and distributes the resulting shares free of cost to existing shareholders. The bonus ratio specifies how many new shares a shareholder receives for each share already held on the record date. A 1:1 ratio means one bonus share per existing share (doubling the shareholding), a 2:1 ratio means two bonus shares per existing share (tripling the shareholding), and a 1:2 ratio means one bonus share for every two shares held.
The mechanics of price adjustment are straightforward. If a share was trading at Rs 600 before a 1:1 bonus, the theoretical ex-bonus price becomes Rs 300, because the total number of shares in the market doubles while the underlying business value remains unchanged. In practice, the market price on the ex-bonus date is adjusted by the exchange automatically. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) both applied a price adjustment factor on the ex-date to reflect the bonus ratio, so that historical charts remain comparable and percentage-return calculations are not distorted.
From an accounting standpoint, a bonus issue does not change the total equity of the company. What changes is the composition of equity on the balance sheet: the free reserves decrease by the amount capitalised, and the paid-up share capital increases by the same amount. Under Ind AS and the Companies Act 2013, a bonus issue can only be made out of free reserves built up from genuine profits, the securities premium account, or the capital redemption reserve. A company cannot issue bonus shares out of revaluation reserves — a restriction intended to prevent fictitious capitalisation.
The face value per share remains unchanged in a standard bonus issue (unlike a stock split, where the face value is reduced). A company with a face value of Rs 2 per share that carries out a 2:1 bonus issue will have three times as many shares outstanding, each still carrying a face value of Rs 2. Total paid-up capital (face value multiplied by number of shares) increases, offset by a corresponding reduction in reserves.
Investors often misinterpret bonus issues as a value-creating event in and of themselves. While a bonus issue does not alter the fundamental value of the business, it can have secondary effects: the lower absolute share price may improve market liquidity by making the stock accessible to a broader investor base, and a bonus announcement often signals management confidence in the company's financial health, which can influence market sentiment. Companies that have consistently issued bonuses over many years — such as several large-cap Indian companies — sometimes find that the cumulative effect on share count and dividend payouts becomes a useful way to track compounding returns over decades.