What is a bonus issue?

A company keeps the profits it does not pay out. They accumulate on the balance sheet as reserves, and they are already yours in the only sense that matters: as a shareholder you own the company, and the company owns them. A bonus issue does not hand you anything new. It capitalises part of those reserves, which is an accounting transfer that moves an amount out of reserves and into paid-up share capital, and it issues new shares to match the amount moved. Nothing enters the company. Nothing leaves it. The assets are the same, the earnings are the same, the cash is the same. What changes is the internal labelling of the equity, and the number of certificates that equity is divided into.

The size of the transfer is not arbitrary. New shares are issued at face value, so the reserves a bonus consumes are exactly the face value of every new share created. That single fact is what makes a bonus a real corporate act rather than a formatting change, and it is the whole of the difference between a bonus and a split. A split subdivides the shares that already exist. It touches no reserves, it moves no amount anywhere, and it changes the face value of each share instead. Two actions, near-identical on your screen, and only one of them requires the company to have something to spend.

The figure sets the two side by side on the balance sheet, which is the only place they look different. Watch the share capital block and the reserves block. In the bonus panel they trade places by exactly the amount capitalised, and the totals stay level. In the split panel neither of them moves at all.

This is why the two actions carry different information even though they produce the same arithmetic. A split says the board would like a smaller sticker price. A bonus says that, and also says the company had qualifying reserves sitting there, and chose to convert them into permanent share capital rather than keep them flexible. Reserves can be paid out later as a dividend. Share capital cannot be handed back nearly so easily. A bonus is therefore a one-way door, and walking through it is a statement about what the company expects to be able to afford.

Because the company's value has not moved while the number of shares has risen, the price per share must fall in proportion. This is not a market reaction and not a matter of sentiment; it is a division. The market capitalisation is the share count multiplied by the price, and if the first factor doubles while the product is pinned, the second factor halves. Take a 1:1 bonus, one free share for every one held.

Two rows in that table are doing the real work, and they are the two that do not move. Your total is unchanged because the bonus reached every shareholder in the same proportion at the same instant, so nobody's slice grew relative to anybody else's. And the price-to-earnings ratio is unchanged because the bonus halved the numerator and the denominator together: the price fell by half, and the earnings attributable to each share fell by half alongside it. Every per-share number in the company's accounts is now expressed in units that are half the size. Not one of them describes a different business.

There is a cleaner way to see it than a table, and it generalises to every ratio at once. Your wealth in a single holding is the share count multiplied by the price per share. Fix that product and you have described a curve: the set of all the pairs of share count and price that leave you exactly as rich. A bonus changes both factors, in opposite proportion, by construction. So a bonus cannot move you off that curve. It can only slide you along it.

Indian bonus issues are quoted as a ratio of new shares to shares held. The first number is what you receive; the second is what you must already own to receive it. A 1:1 is one free share for every one held. A 3:2 is three free shares for every two held. The convention trips people up because a 1:2 sounds larger than it is: it means one new share for every two you hold, so your holding grows by half, not by double.

The ratio decides two things at once, and only one of them is about you. It decides how far the price adjusts, which is the column most readers look at and the column that changes nothing. It also decides what the bonus costs the company, which is the column almost nobody computes and the one that carries the information. Because every new share is issued at face value, the reserves the company must capitalise are the ratio multiplied by the existing paid-up share capital. A 1:1 bonus consumes reserves equal to the whole of the paid-up capital. A 2:1 consumes twice that. This is why a large ratio is not a generous gesture but an expensive one, and why it cannot be faked.

Read the last two columns together and the shape of the thing appears. Moving down the table, the price effect grows and your wealth does not, while the demand on the balance sheet grows in step. That correspondence is the reason the ratio is worth reading at all. It is not a measure of what you received, because you received nothing. It is a measure of what the company was able and willing to spend from its reserves to say so.

A company cannot conjure a bonus at will, and the constraints are exactly what give it meaning. As of 17 July 2026, under Section 63 of the Companies Act 2013, fully paid-up bonus shares may be issued only out of free reserves, the securities premium account, or the capital redemption reserve. They may not be funded out of reserves created by revaluing assets, and a bonus may not be issued in lieu of a dividend. The issue must be authorised by the company's articles and approved by shareholders, and the company must not have defaulted on its debt or on statutory dues such as provident fund contributions and gratuity. For listed companies the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 repeat the same discipline: the bonus must be built out of genuine profits or share premium actually collected in cash.

The revaluation bar is the load-bearing one and it is worth dwelling on. Revaluation reserves arise when a company writes an asset up on paper, typically property. Nothing was earned, nothing was collected, and no cash appeared; an accountant simply marked a number higher. If that reserve could be capitalised, a company with a stale property register could issue itself a spectacular bonus ratio and signal a confidence it had never earned. Barring it means the pool a bonus draws on is limited to profits actually made and premium actually collected. That is what turns the ratio into evidence.

Eligibility turns on one date. The company announces a record date, and if the shares sit in your demat account at the end of it, you are entitled to the bonus. On the ex-bonus date, the first trading day on which the share trades without the entitlement, the exchange restates the quoted price for the larger share count. What used to be slow is now fast at the other end: under a SEBI circular of 16 September 2024, for bonus issues announced on or after 1 October 2024, the shares must be credited and available to trade within T+2 working days, where T is the record date. It could previously take the better part of a week.

Now be precise about what happens on the ex-date, because the honest description is sharper than the reassuring one. The quote really does open near half. That is not a data error and not an illusion: the market genuinely is trading a share that represents half as much of the company as it did the day before, and it prices it accordingly. What is false is not the fall. What is false is reading the fall as a loss. You are not poorer, because the missing half of the price is sitting in your account as shares, or is about to be. The screen is telling the truth about the price and saying nothing at all about your wealth.

That distinction matters more than it sounds, because a number on a screen is not the only thing reading the price. Your orders are reading it too, and they read it as a number and nothing else. A stop-loss is an absolute price with a thesis behind it: you decided, weeks ago, that below some level you were wrong. A bonus does not touch your thesis. It re-denominates the scale your thesis was written on, and it does not go back and rewrite the instruction you left in the book.

Whether any particular order actually fires depends on details worth knowing rather than guessing. A plain day order lapses overnight and will not survive to the ex-date at all. Standing instructions are a different matter, and brokers vary in how they treat them around corporate actions; many cancel or flag them precisely because of the problem above. The point is not that a stop will definitely execute. The point is that its survival is not something you should be discovering afterwards. The same applies to price alerts, to trailing rules expressed in rupees rather than percent, and to any spreadsheet or downloaded price history you keep yourself, which will show the ex-date as a fall of half unless something adjusted it.

Here is the puzzle the arithmetic leaves behind. A bonus changes nothing about a company's assets, earnings or cash, and your wealth is identical the moment before and the moment after. Yet studies of Indian bonus issues consistently find small positive abnormal returns around the announcement, and the pattern is not random: the effect tends to be larger for bigger bonus ratios and for smaller companies, and it often begins several days before the public announcement, which is the fingerprint of information leaking into the market. If the bonus itself is worth nothing, what exactly is being paid for?

The answer is that the market is not pricing the shares. It is pricing the fact that the board was willing and able to issue them. This is the signalling hypothesis, and everything in the sections above is what makes it work. A bonus is not costless to declare. It can only be paid out of reserves that were genuinely earned or genuinely collected, so declaring a large one is a public demonstration that those reserves exist and are not an accounting artefact. It converts flexible reserves into permanent share capital, which is a door that does not swing back. And it enlarges the equity base the company must go on servicing, which is comfortable only if profits keep pace. A board that does all three is making a statement it would be expensive to make dishonestly. Consistent with that, researchers have found that bonus issuers tend to show superior operating performance afterwards compared with similar firms that did not issue one, which is what you would expect if the signal were credible rather than cosmetic.

Hold both halves of that and you can read a bonus properly. The shares are worth exactly what they were the instant they are credited, so nothing in the announcement is a gain you can bank. What may have changed is the market's estimate of the earnings and the reserves behind the shares, and an estimate is a thing that can be wrong. Signals are cheap talk when they cost nothing and evidence when they cost something; a bonus sits in the second category, which is why it moves the price, and it is still only evidence about the past and an intention about the future. The disciplined reading is to treat a bonus as information to verify, not a reward to collect: go and look at whether the reserves and the profit growth actually support the confidence the ratio implies. The signal points at the accounts. It is not a substitute for reading them.

Four corporate actions are confused constantly, and the confusion is understandable because two of them look identical on your screen and a third looks like a gift. The clean way to separate them is to ask three questions in order: does cash change hands, does the share count change, and what happens to the reserves. Every one of the four answers that trio differently, and the answers are the whole taxonomy.

The pairs are instructive. A bonus and a split both hand you more shares at a lower price with no cash moving anywhere, and they differ only in whether the reserves were touched, which is invisible on your screen and decisive on the balance sheet. A bonus and a dividend both draw on reserves, and they differ in whether anything leaves the building: a dividend converts reserves into cash in your bank, a bonus converts reserves into share capital that stays exactly where it was. A bonus and a rights issue both enlarge the share count, and they are opposites in the only way that counts: a rights issue asks you for money and is therefore a genuine investment decision, while a bonus asks you for nothing and is therefore not a decision at all.

That last contrast is the one to carry. Three of these four actions require nothing from you and give you nothing you did not already own; one of them asks you to write a cheque. Confusing the free rearrangements with the paid decision is how people manage to feel rewarded by a bonus and ambushed by a rights issue, when the truth is closer to the reverse: the bonus was never a gift, and the rights issue was the only one that was ever a question.

The tax treatment is specific, and it is where most explanations go slightly wrong in a way that matters. Receiving the bonus is not a taxable event: it is not income, it is not a dividend, and nothing is due when the shares land. As of 17 July 2026, the rules that bite are two. Under Section 55 of the Income-tax Act 1961, the cost of acquisition of bonus shares is treated as nil. And the holding period of bonus shares runs from the date they were allotted, not from the date you bought the shares that earned them.

Read carelessly, that sounds like a tax created out of nothing: shares with no cost, so their entire sale value is a gain. Read carefully, it is not. Your original shares keep their full original cost and their full original clock; the bonus shares carry none of it. So the total cost base of the holding is exactly what it was before the bonus, and if you sold the whole position the taxable gain would be identical to the gain you would have had without the bonus. In aggregate a bonus does not add a rupee of tax. It redistributes the cost you already had, and it starts a second clock.

The distribution and the clock are where the real effects live. Because the bonus shares have nil cost, any of them you eventually sell will be taxed on their whole sale value, and because their clock starts at allotment, they are short-term holdings for their first twelve months no matter how long you have owned the underlying company. A position you think of as a decade-old investment now contains a lot of freshly minted shares. Which shares are treated as sold is not up to your intentions either: for holdings in demat form the first-in-first-out convention decides it, so the bonus shares, having entered last, are the last to leave. The practical shape of it is that a bonus tends to defer and back-load the tax rather than create it, leaving the nil-cost shares at the back of the queue.

The last row is the anti-avoidance rule, and it exists because the nil-cost treatment is exploitable if nobody is watching. The trade it kills is the obvious one: buy shortly before the record date, collect the bonus, sell the originals at the mechanically lower ex-bonus price to book an artificial short-term loss, and keep the nil-cost bonus shares. Section 94(8) disallows that loss where the original shares were acquired within three months before the record date and sold within nine months after it while the bonus shares are still held, and it adds the disallowed loss to the cost of the bonus shares instead. It was extended from units to securities with effect from 1 April 2023. It is a good illustration of the theme of this whole page: the loss was never real, so the law declines to pay for it.

Put the pieces together and a bonus issue turns out to be a small, honest, easily oversold thing. It tells you three facts, and they are real. The company held qualifying reserves, because the law would not have let it proceed otherwise. It was willing to convert them into permanent share capital, which is a commitment rather than a gesture. And its board wanted a lower sticker price and a more liquid, more accessible share, which is a preference worth knowing. The larger the ratio, the more of the first two you learn, because the ratio is exactly the price of the statement.

It tells you nothing at all about several things people routinely read into it. It does not tell you the shares are cheap: the price-to-earnings ratio did not move, and a lower sticker price on twice as many shares is not a discount. It does not tell you earnings will grow into the enlarged capital; it tells you the board thinks they will, which is an opinion held by people with more information than you and more incentive than you to be optimistic in public. It does not tell you the reserves were well spent, only that they existed. And it emphatically does not tell you that you are richer, because the arithmetic in the second section forecloses that: you cannot leave the curve.

So the useful response to a bonus announcement is not to act on it but to use it. It is a prompt: go and read why the company had those reserves, whether the profits behind them are still being made, and whether the enlarged share count is something the earnings can carry. That is a research task, and the answer might be that the signal was right, or that a confident board was wrong, or that the reserves were real and the business has since turned. All three happen. Learning to run that check yourself, rather than taking the headline at its word, is the whole difference between reacting to a corporate action and understanding a company, and it is exactly what the method we teach is built to make routine.

• SEBI, T+2 trading of bonus shares. Circular dated 16 September 2024, requiring bonus shares to be credited and available for trading within T+2 working days of the record date, for issues announced on or after 1 October 2024. sebi.gov.in
• Companies Act 2013, Section 63. Bonus shares may be issued only out of free reserves, the securities premium account or the capital redemption reserve; not out of reserves created by revaluing assets; and not in lieu of a dividend. The primary text is published by the Ministry of Corporate Affairs. mca.gov.in
• SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018. For listed companies, a bonus must be built out of genuine profits or securities premium collected in cash, and revaluation reserves may not be capitalised. sebi.gov.in
• Income-tax Act 1961. Section 55 treats the cost of acquisition of bonus shares as nil, and the holding period runs from allotment; Section 94(8) addresses bonus stripping and was extended to securities with effect from 1 April 2023. Positions stated as of 17 July 2026. incometaxindia.gov.in
• How corporate actions are processed. The stock exchanges publish record and ex-dates and restate the quoted price on the ex-date; eligibility follows the demat position on the record date. nseindia.com
• Signalling evidence. Event studies of Indian bonus issues document small positive abnormal returns around the announcement, related to the bonus ratio and firm size and often preceded by information leakage, with issuers showing superior subsequent operating performance, consistent with the signalling hypothesis rather than with value creation.