Difference Between Bonus Shares And Stock Split

Updated: Tuesday, December 7, 2021, 12:27 [IST]

Often as development at listed concerns we come across these 2 terms 'Bonus share issue' and 'Stock Split' which are indeed corporate actions and before such events the stock comes into action. Say for instance, as we saw today even in the brutal sell-off, the stock of JBM Auto just ahead of its board meet for stock split agenda managed to end higher by 11 percent. Likewise, another scrip Panchsheel Organics, a pharma company, which turned ex-bonus today ended at upper circuit limit of Rs. 123.95 per share.

So, here we will understand the two terms and what is the prime difference between the two:

Bonus shares:

Bonus shares are issued to existing shareholders in some pre-decided proportion say if the bonus share issue is 2:1 that implies for every 1 share, the shareholders owns he or she shall get 2 more shares at no cost. In a bonus share issuance, money lying in the free reserves and surplus is moved to the capital and from it fresh shares are issued at the existing face value of the shares of the company. So, upon issuance of bonus shares, face value remains unaltered.

The prime purpose or impact of bonus issue are as following:

Outstanding equity shares of the concern get increased

Share price is reduced in proportion to the number of shares issued

Bonus shares create implicit value per share

Liquidity in shares is increased at stock exchanges

Reduces per share ratio for eg: Book value per share, EPS etc.

Stock Split:

This is again a corporate action wherein the company divides its shares into multiple shares in order to boost liquidity. In a stock split, the market value of the total outstanding shares remains the same but the market value of a single share gets reduced in proportion to the number of shares drawn out from a single share. In comparison to the pre-split value, the total value of shares remains the same so there is no addition of real value in the case of a stock split as the case maybe.

Difference between bonus shares and stock split:

Basis	Bonus shares	Stock split
Meaning	Free additional shares issued to existing shareholders based on the number of shares already owned	Already owned shares split into smaller shares
Reason	To distribute accumulate earnings among shareholders but not in cash	To improve liquidity in the scrip by sub-dividing into smaller size
Face value	Remains same	Reduces in proportion of split ratio
Share capital and reserves	Gets reduced as money into share capital from which new equity is issued	No impact
Impact on future dividend	No impact, remain same	Reduces in proportion to split ratio
Beneficiaries	Shareholders as on record date	Shareholders
Example	2:1 bonus issue; 2 shares shall be issued for 1 share owned by the shareholder. Hence in total the shareholder will have 3 shares of same FV as before	Stock split-1:10 Every already owned share is split into 10 new shares of new FV of 1/10 of original FV."