A bonus issue is a corporate action through which the company issues more shares to the existing shareholders from its stored equity capital. The share price gets changed based on the bonus issue ratio but face value remains unchanged even after the bonus issue.
Benefits and characteristics
Divides more equity capital at the face value among the investors to boost the investor confidence.
Reduce the share price of very high priced shares so that small investors can afford them.
Increase the liquidity by increasing the number of tradable shares in the market.
Dividend payment is expressed as a percentage of face value. As the face value remains same and number of shares increases, the future dividend payment will be increased.
Suppose the face value, share price and total numbers of shares were USD 10, USD 100 and 100 respectively before the bonus issue.
Before the bonus issue the market cap was USD 10,000 (100*100).
The equity capital before the bonus issue was USD 1000 (10*100).
Bonus issue is done at the ratio of 1:1.
After the bonus issue, the face value, share price and total number of shares will be USD 10, USD 50 and 200 respectively.
After the bonus issue the market cap will be USD 10,000 (50*200).
Here the face value, equity capital and market capitalization remain the same as before.
The equity capital after the bonus issue will be USD 2000 (10*200).
Total equity capital got increased because of the bonus issue. The division of different equity capital amounts will be changed.
Companies use bonus issue to increase the number of shares in the market or reduce the market price of the shares. Sometimes the share price of a company becomes very high because of continuous rising and becomes unaffordable by the small investors. To make them affordable by the retail investors and to boost the investor confidence, the companies go for bonus issue.