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What is a Bonus issue?

A bonus issue is the distribution of free shares by the company to the existing shareholders. A company may decide to distribute additional shares as an alternative to dividend payout. In a bonus issue, the number of shares increases, but the value of the investment remains the same.

Example scenario

Mr A holds 100 shares of a company at ₹10 each. If that company announces a 2:1 bonus, that is, for every one share, the shareholder will receive two shares for free, Mr A will receive 200 shares for the 100 shares held in the demat account, and the total holdings of Mr A will be 300 shares. However, the investment value will remain the same.
Value of investment before Bonus issue: 100 × 10 = 1000₹
Value of investment after Bonus issue: 300 × 3.33(300/1000) = 1000₹
Shares must be purchased before the ex-date to be eligible for a bonus.

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