Bonus Issue

Definition

A bonus issue — also called a capitalisation issue or scrip dividend — is a corporate action in which a company allots additional shares to its existing shareholders free of cost, funded by transferring the company's accumulated free reserves, securities premium, or capital redemption reserve into paid-up share capital. Shareholders receive bonus shares in proportion to their existing holdings based on a stated ratio (e.g., 1:1 means one bonus share for every share held). Unlike a dividend, no cash leaves the company; the reserves are simply converted into equity capital. The face value per share remains unchanged, which differentiates a bonus issue from a stock split at the accounting level, even though both actions increase the share count and reduce the market price proportionally.

Why it matters

A bonus issue is widely interpreted by the Indian market as a signal of financial health — a company can only issue bonus shares if it has sufficient free reserves, indicating strong accumulated profits. This perception often leads to a positive sentiment rally in the stock before the record date. For delivery investors, bonus shares are credited to the demat account after the record date at no cost, effectively lowering the average cost of acquisition. For F&O traders, a bonus issue triggers exchange-level adjustments analogous to those for a stock split: NSE reduces all existing option strikes by the bonus adjustment factor and increases the lot size proportionally, preserving the notional value of each open contract. The adjustment factor for a bonus in ratio M:N is (N + M) / N — for a 1:1 bonus, the factor is 2/1 = 2, so strikes are halved and lot sizes doubled. Traders must update their payoff models and stop-loss levels immediately after the adjustment becomes effective.

Formula

For a bonus ratio of M bonus shares for every N shares held: Adjustment Factor = (N + M) / N. New Share Price = Old Price ÷ Adjustment Factor. New Shares Held = Old Shares × (N + M) / N. For F&O: New Strike = Old Strike ÷ Adjustment Factor. New Lot Size = Old Lot Size × Adjustment Factor. The face value per share is unchanged throughout.

Example

Suppose a hypothetical company "Zeta Cables Ltd" has a share price of ₹900 and announces a 1:1 bonus issue (one bonus share for every share held) with a record date on a Wednesday. An investor holding 100 shares worth ₹90,000 will, after the bonus credits on Thursday, hold 200 shares. The exchange sets the reference price on Thursday at ₹900 ÷ 2 = ₹450, so the holding value remains ₹90,000. NSE simultaneously adjusts Zeta Cables' option contracts: a 950 CE becomes a 475 CE, and the lot size doubles. A trader who held 1 lot of the 950 CE short now holds 1 lot of the 475 CE short with twice as many shares per lot — the total position exposure and PnL are unchanged, but the strike and contract size are halved and doubled respectively.

Related

• Stock Split
• Corporate Action Adjustment
• Record Date