Share Split – When a company declares a share split, the number of outstanding shares increases, but the market capitalization remains the same. This involves division of equity shares by lowering their face value. After share split, Earning per Share (EPS) of the company falls by the same extent.

For Example – In May 2016, Transcorp International announced 10:2 share split, which means 1 share of Rs. 10 face value will now be 5 shares of Rs. 2 face value. Thus, a person holding 200 shares of Transcorp International will get 1,000 shares after the stock split.

March 2016 June 2016 Effect
Number of Outstanding Shares (a) 50,85,239 2,54,26,195 Increased by 5 times
Price (In Rs.) (b) 59 11.80 Decreased by 5 times
Market Cap (In Rs.) (a)*(b) 300,029,101 300,029,101 Remain Same

Why Does the Company Go For A Share Split?

Share splits are carried out with the intention of increasing liquidity in the market. When share price of the company becomes expensive, smaller investors find it difficult to invest in it. To make the stock attractive, the company carries out the split, which brings down the share price.

So, investors who were unwilling to pay Rs 1,000 for a single share may be more inclined to buy the same share at Rs 250, following a 4:1 split.

What’s in it for Shareholders?

If you own a share that declares a split, the number of shares you would own after the split increases. However, the price per share reduces.

Keep in mind that a stock split may not result in benefits for investors who bought the split share at lower price.

Investors should look at the fundamentals of the company before taking a position immediately after a share split. In general, share split is a corporate action which has nothing to with the business of the company.

Bonus Issue – When a company declares a bonus issue, the investors get bonus shares in proportion to the number of shares they hold. After the bonus issue, the number of outstanding shares increases and the EPS falls by the same extent.

A 1:2 bonus means that a shareholder will get 1 share for every 2 shares that he holds. i.e. if you are holding 10 shares, you will get 5 bonus shares. You do not need to pay anything for these shares.

For Example – In July 2016, Berger Paints announced 2:5 bonus issues, which means for every 5 share, investors will get 2 shares. Thus, a person holding 200 shares of Berger Paints will get 80 bonus shares.

June 2016 August 2016 Effect
Number of Outstanding Shares (a) 69,34,77,912 97,08,69,077 Increased by 1.4 times
Price (In Rs.) (b) 308 220 Decreased by 1.4 times
Market Cap (In Rs Cr.) (a)*(b) 21,359.12 21,359.12 Remain Same

Why Does the Company Go For Bonus Issue?

Giving bonus shares is one of the ways companies reward their shareholders without disturbing their cash balances

To give bonus shares to investors, a company builds a reserve by retaining a part of its profit over the years (the part that is not paid as dividend). When these free reserves increase, the company transfers a part of the money into the capital account, from which it issues bonus shares.

  • Reward the shareholders
  • Increase the liquidity
  • Bring the stock price in a reasonable price range

Things You Need To Know

[1] Record Date: The cut-off date fixed by a company to determine who is eligible to get bonus shares. You get the benefit only if you have shares in your demat account on this date

[2] Ex Bonus: It means after the record date. It is the date on which the share price is adjusted on stock exchanges according to the bonus ratio.

Also see: Record vs Ex Date

 What’s in it for Shareholders?

If you own shares of a company that declares bonus, the number of shares you would own after the bonus increases. However, the price per share reduces.

Keep in mind that if you want to buy shares of companies which are going to announce split or bonus issues, hold on. You should not buy purely on the basis of expected bonus or split unless you are certain about the fundamentals of the company.