What is Bonus Issue?

About Bonus Issue:

• A bonus issue, also known as a scrip issue or a capitalization issue, occurs when a company listed on a stock exchange decides to offer free additional shares to the existing shareholders.
• The company decides the number of bonus shares to be allotted to every individual investor for holding a certain number of shares over a set period of time and accordingly rewards them.
  • For example, a company may give one bonus share for every five shares held.
• This bonus issue aims to attract further investment and reward its existing shareholders as it improves the entity's market image.
• A bonus issue of shares will increase a company's share capital but not its market capitalisation.
  • Market capitalisation is calculated by multiplying the company's current stock price and the total number of outstanding shares. Share capital is the amount that the company raises by issuing shares.
  • By issuing bonus shares, the number of outstanding shares increases with a proportional decrease in the value of each share, ensuring no change in the market capitalization. However, the face value of the shares remains unchanged.
• Bonus shares do not dilute shareholders’ equity because they are issued in a constant ratio that keeps the relative equity of each shareholder the same as before the issue.
• A bonus share issue is funded by the company's healthy profits reflected in its annual or quarterly results or from its share reserves. 
• The issuanceof bonus shares is not taxable; however, shareholders must still pay capital gains taxif they sell them for a net gain.

What is a Stock Split?

• A stock split is an action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares.
• A split is usually undertaken when the stock price is high, making it pricey for investors to acquire.
• It brings down the share price as the number of shares increases.
• The market cap of the firm and the value of each shareholder’s investment stay unchanged after a stock split.

Stock Split v/s Bonus Issue:

• Most people mistake stock splits for bonus concerns. This is due to the fact that, similar to stock splits, bonus issues can result in a rise in the company's share count.
• In contrast to a stock split, where the face value of each share is decreased, a bonus issue offer sexisting owners more shares at no cost in proportion to the shares they now possess in the company. 
• Therefore, bonus shares raise the company's share capital while a stock split keeps it constant.
• However, in both scenarios, the number of shares rises and the share price falls accordingly.

Q1: What Is Equity?

Equity, referred to as shareholders' equity (or owners' equity for privately held companies), represents the amount of money that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debt was paid off in the case of liquidation. In the case of acquisition, it is the value of company sales minus any liabilities owed by the company not transferred with the sale.

In addition, shareholder equity can represent the book value of a company. Equity can sometimes be offered as payment-in-kind. It also represents the pro-rata ownership of a company's shares

Source: Reliance Industries to consider 1:1 bonus: A look at RIL's bonus history