What Are Bonus Shares and How Do They Work?

Bonus Shares are like a company’s way of saying “thank you” to existing owners. Instead of paying cash, the company converts part of its accumulated reserves into new equity and allots these extra units for free. For a long-term investor, Bonus Shares often read as a sign of confidence: ownership proportion stays the same, trading can feel smoother, and the story of the business—not fresh money from investors—drives value.

What are Bonus Shares?

Think of the company as one large pie. Bonus Shares don’t bake a new pie; they simply cut the existing pie into more slices. Shareholders receive additional slices in a fixed ratio—1:1, 2:1, or 3:5—on the record date. Because there are more slices after Bonus Shares, the price per slice usually adjusts downward, while the size of an investor’s overall pie remains broadly similar right after allotment.

How Do Bonus Shares Work?

The board decides to capitalise free reserves (or securities premium) and move them into share capital. After approvals, the company announces an ex-bonus and a record date. Anyone who is a shareholder on the record date becomes entitled to Bonus Shares.
 Example: an investor owns 100 shares at ₹1,000 each. The company declares a 1:1 Bonus Shares issue. After allotment, the holding becomes 200 shares. The market price may mechanically adjust to around ₹500, so the total market value stays near ₹1,00,000. The business did not change overnight; only the arithmetic of shares and price did.

Who is eligible for bonus shares?

Eligibility is simple: shareholders whose names appear on the company’s register on the record date are eligible for bonus shares. Credits to the demat account usually follow within a few working days. Those trading close to the ex-date typically check settlement timelines so the entitlement to Bonus Shares appears correctly.

Types of Bonus Shares

• Fully paid Bonus Shares:
  the usual route—fully paid-up shares issued by capitalising reserves.
• Partly paid adjustments:
  rare legacy cases where partly paid shares are regularised using reserves.
• Ratio-based issues:
  the headline “1:1” or “2:1” describes how many Bonus Shares each existing share attracts.

Why do companies issue bonus shares?

Companies issue Bonus Shares to reward loyalty and present balance-sheet strength in a friendly format. A lower per-share price after the issue can make trading more accessible for retail investors, while a larger float often improves liquidity. In plain words, Bonus Shares tidy up capital and send a quiet signal that reserves are healthy.

• Improve liquidity with a higher share count.
  
• Bring the stock price into a more approachable trading band.
  
• Convert reserves into long-term equity, signaling confidence.

Advantages of Bonus Shares

• No cash outflow:
  shareholders receive extra units without paying anything; ownership proportion stays intact.
• Better market depth:
  more shares in circulation can tighten bid–ask spreads and ease entry or exit.
• Potential tax efficiency:
  depending on local rules, Bonus Shares may influence the cost basis used for future capital gains.
• Positive signaling:
  steady reserves and sensible capital allocation often sit behind such announcements.

Disadvantages of Bonus Shares

• No instant value boost:
  the price typically adjusts downward as the share count rises.
• EPS dilution:
  earnings per share can fall until profits grow to match the expanded capital.
• Expectation drift:
  frequent Bonus Shares may lead investors to expect them regularly or prefer them over cash dividends.
• Event volatility:
  prices can swing around board approval, record date and ex-date.

Conclusion

Bonus Shares are a clean piece of financial housekeeping, turning reserves into share capital and spreading ownership across more units. They feel reassuring when backed by real earnings power, clear communication and disciplined capital use. Over time, the company’s performance—not the issuance of Bonus Shares itself—creates enduring wealth.

FAQs

Q1. How does bonus share work with an example?

A 1:1 Bonus Shares issue gives one extra share for every share held. If someone owns 50, they receive 50 more to become 100. The price usually adjusts so the total value remains broadly similar right after the issue.

Q2. Is it good to buy bonus shares?

Buying only for Bonus Shares is not a strategy on its own. The decision is stronger when the company shows resilient profits, steady cash flow, sound governance and sensible capital allocation.

Q3. Can I sell bonus shares immediately?

After Bonus Shares are credited and trading permissions open, they can be sold under normal settlement rules. Timelines may vary by broker and exchange processes.

Q4. Does the issue of bonus shares enhance the company’s value?

By itself, no. Bonus Shares rearrange equity and reserves. Long-term value grows with earnings, cash generation and competitive strength.

Q5. Who is Eligible for Bonus Shares?

Shareholders whose names appear on the record date are eligible for Bonus Shares, and the credited units reflect in their demat accounts after processing.

Disclaimer : Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.