Bonus share

Bonus shares are shares distributed by a company to its current shareholders as fully paid shares free of charge. ^[1]

• to capitalise a part of the company's retained earnings
• for conversion of its share premium account, or
• distribution of treasury shares.

An issue of bonus shares is referred to as a bonus share issue.

Valuation and Ratios

A bonus issue is usually based upon the number of shares that shareholders already own. ^[2] The process follows the mathematical logic of a capital increase from company funds (German: Kapitalerhöhung aus Gesellschaftsmitteln). ^[3]

• Bonus Ratio (${\displaystyle a}$):

The ratio is expressed as ${\displaystyle a={\text{Old Shares}}:{\text{New Shares}}}$.

Example: If a company with 300,000 existing shares issues 100,000 bonus shares, the ratio is 3:1. ^[4]

• Impact on Share Price (TERP):

Because no new capital enters the company, the market price per share decreases proportionally. The Theoretical Ex-Rights Price (TERP), or Mischkurs, is calculated by dividing the old market price (${\displaystyle K_{a}}$) by the adjusted ratio. ^[5]

${\displaystyle {\text{TERP}}={\frac {a\cdot K_{a}}{a+n}}}$

Where ${\displaystyle n}$ is the number of bonus shares per rights held. If ${\displaystyle K_{a}=200\%}$ and the ratio is 3:1:

${\displaystyle {\text{TERP}}={\frac {3\cdot 200}{3+1}}=150\%}$.

Process

Whenever a company announces a bonus issue, it also announces a book closure date which is a date on which the company will ideally temporarily close fresh transfers of stock. This ensures that the bonus shares are allocated to the correct beneficial owners recorded in the register of members at the record date. ^[6]

Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus shares are distributed in a fixed ratio to the shareholders. ^[7]

Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. Under English law, for example, Section 610 of the Companies Act 2006 permits the use of the share premium account to pay up fully paid bonus shares. ^[8]

Because a bonus issue does not represent an economic event, no wealth changes hands at the point of issuance. The current shareholders simply receive new shares, for free, and in proportion to their previous share in the company. Therefore, a bonus share issue is very similar to a stock split. The only practical difference is that a bonus issue creates a change in the structure of the company's shareholders' equity by moving funds from retained earnings or reserves to share capital. ^[9] Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's authorized share capital, the distribution of bonus shares only changes its issued share capital (or even only its outstanding shares). ^[10]

Tax and Legal Implications

A bonus share issue is most commonly not taxed as a dividend at the time of receipt, even if it is charged to retained earnings. ^[11] From a legal standpoint, this is because a bonus issue is characterized as a "re-shuffling" of the company's capital accounts rather than a distribution of new wealth to the shareholder. ^[12] However, there are significant capital gains implications upon the subsequent sale of these shares:

• Cost Basis (Zero-Cost Allocation): In many jurisdictions, the cost base of the bonus shares is considered to be zero. Effectively, the total original investment is spread across a larger number of shares, reducing the average cost per share. ^[13]
• Holding Period: For tax purposes, the acquisition date of the bonus shares is typically deemed to be the same as the acquisition date of the original (parent) shares. ^[14]
• Taxable Exceptions: If a shareholder has the option to receive cash instead of bonus shares (a scrip dividend), the issue may be treated as a taxable dividend equal to the market value of the shares. ^[15]

References

1. "Section 63 of Companies act 2013 - Issue of bonus shares". India: Corporate Law Reporter. April 1, 2014.
2. "Definition of 'Bonus Share'", "The Economic Times"
3. Herbert Vormbaum (1981). Finanzierung der Betriebe. pp. 145–147.
4. Herbert Vormbaum (1981). Finanzierung der Betriebe. p. 146.
5. Angela Bol (2021). Corporate Governance. p. 131.
6. "Record Date: What It Is and How It Works". Investopedia. Retrieved 2025-12-31.
7. "what are the objective of issued bonus shares Related: SEBI Guidelines for Issue of Bonus Shares - Advanced Corporate Accounting? | EduRev B Com Question". EDUREV.IN. Retrieved 2023-07-30.
8. "Companies Act 2006, Section 610: Application of share premium". UK Government.
9. "IAS 33 Earnings Per Share". IFRS Foundation. Bonus issues do not result in a change in resources.
10. "What Are Bonus Shares? – Advantages & Disadvantages". Advisorymandi. October 11, 2018.
11. "Publication 550: Investment Income and Expenses". Internal Revenue Service. Stock dividends and stock rights are generally not taxable to you.
12. "Capital Gains Manual: CG50200 - Shares and securities: bonus issues". HM Revenue & Customs. A bonus issue of shares is not a distribution for tax purposes... the new shares are treated as part of the same asset as the original shares.
13. "Bonus shares and CGT". Australian Taxation Office. For most bonus shares issued on or after 20 September 1985, the cost base of the original shares is spread over both the original and the bonus shares.
14. "Publication 550: Holding Period". Internal Revenue Service. Your holding period for the new stock includes the holding period of the old stock.
15. "Tax Treatment of Bonus Shares" (PDF). Deloitte.