Definition (plain language)
A bonus issue (also called a scrip issue or capitalization issue) is when a company gives existing shareholders additional shares for free, in proportion to the shares they already own. The company does this by converting a portion of its reserves or retained earnings into share capital. The shareholder’s percentage ownership stays the same, but the number of shares they hold increases and the per-share market price adjusts downward in proportion to the issue.
Key terms (defined)
– Bonus shares / scrip issue / capitalization issue: free additional shares issued to current shareholders in a fixed ratio.
– Retained earnings / reserves: accumulated profits or capital set aside on the company’s books that can be reclassified into share capital.
– Market capitalization: share price × outstanding shares; it typically does not change solely because of a bonus issue.
– Stock split: a corporate action that increases the number of shares by splitting existing shares into multiple new shares; similar price effect but different accounting treatment.
– Capital gains tax: tax on the profit when you sell shares for more than your cost basis; tax rules depend on jurisdiction.
How a bonus issue works (step-by-step)
1. Company declares the bonus issue and specifies the ratio (for example 1-for-5 or 3-for-1).
2. The company sets a record date that determines which shareholders are eligible.
3. On the payout or allotment date, the company issues the additional shares to eligible holders in the declared ratio.
4. The total outstanding shares increase; the per-share market price normally falls roughly in inverse proportion to the bonus ratio so that market capitalization (total value) stays close to unchanged.
5. The company typically reclassifies amounts from reserves/retained earnings into share capital on its balance sheet.
Short checklist for investors when a bonus issue is announced
– Confirm the bonus ratio (e.g., 1-for-1, 1-for-5, 3-for-1).
– Note the record date and ex-date so you know eligibility.
– Check whether the company describes the funding source (retained earnings, share premium, etc.).
– Expect a proportional drop in share price; calculate expected post-issue price.
– Verify how your broker will show the new shares
– Ask how your broker handles fractional entitlements. Some brokers round, pay cash in lieu, or credit fractional-share platforms; the treatment can affect your final holding and tax basis.
– Confirm the treatment of share certificates (if you hold physical certificates) and electronic record updates — expect a change in the statement of holdings after the record/ex-date.
– Recalculate position sizes and portfolio weighting after the issue so you know if rebalancing is needed.
Quick math rules (use these to check expected adjustments)
– If the company issues x new shares for every y existing shares (an x-for-y bonus), the new share count multiplier = (y + x) / y.
Example: a 1-for-4 bonus → multiplier = (4 + 1)/4 = 5/4 = 1.25. If you had 100 shares, new total = 100 × 1.25 = 125 shares.
– Expected new market price ≈ old price × (y / (y + x)).
Example: same 1-for-4 bonus and pre-issue price $200 → expected post-issue price ≈ $200 × (4/5) = $160.
– Earnings per share (EPS) adjusts inversely with the share multiplier: EPS_new ≈ EPS_old / multiplier.
Example: pre-issue EPS $4.00, multiplier 1.25 → EPS_new ≈ $3.20.
– Market capitalization (shares × price) should remain roughly unchanged aside from market reaction and transaction costs.
Worked numeric example (step-by-step)
1. You own 120 shares. Company announces a 2-for-5 bonus (x=2, y=5).
2. Multiplier = (5 + 2)/5 = 7/5 = 1.4. New shares = 120 × 1.4 = 168 shares.
3. Pre-issue market price = $50. Expected post-issue price ≈ $50 × (5/7) ≈ $35.71.
4. Pre-issue market cap (your holding) = 120 × $50 = $6,000. Post-issue ≈ 168 × $35.71 ≈ $6,000 (ignoring rounding and market moves).
5. If pre-issue EPS = $2.50, post-issue EPS ≈ $2.50 / 1.4 ≈ $1.79.
Practical implications to check and act on
– Portfolio reporting: update cost basis per share (total cost stays same; per-share cost = total cost / new share count). This matters for future tax calculations.
– Option/warrant adjustments: listed options are typically adjusted by the exchange/clearinghouse (strike price or contract size) — check the official adjustment notice. Unlisted derivatives may be handled differently.
– Liquidity and volatility: more shares outstanding may increase float and trading volume, but price reaction depends on investor perception.
– Corporate governance: your voting power per share stays the same, but absolute voting weight equals new shares × votes per share; some companies change voting arrangements separately.
Tax and accounting notes (general)
– Accounting: the company usually transfers amounts from reserves/retained earnings to share capital and possibly share premium; total shareholders’ equity remains the same.
– Tax: many jurisdictions treat bonus issues as a notional capitalisation (not a taxable dividend), but tax rules differ. Check local tax authority guidance or a tax professional for your situation.
Checklist before
trading or reacting to a bonus issue
Checklist before you act
– Read the company announcement and exchange/clearing adjustment notice. Confirm the bonus ratio (for example, 1-for-4) and the record date, ex‑date, and payment/allotment date.
– Check the exact adjustment method from your broker or the exchange/clearinghouse. Derivative contracts (options, futures, CFDs) are adjusted by the relevant clearing organization, not always by brokers.
– Confirm whether the issue is a bonus (capitalisation) issue, stock split, or a combination — the accounting and paperwork can differ.
– Note whether shares issued have the same voting rights and whether any fractional shares will be cashed out (rounding rules).
– Assess tax guidance for your jurisdiction (treatment varies). If necessary, ask a tax professional.
– Review margin and collateral implications with your broker — some brokers treat the new shares differently for margin calculations.
– For option/futures holders: check official adjustment notices (OCC in the U.S., exchange memos elsewhere) and don’t assume no change just because the underlying price looks adjusted.
– Update or plan stop-losses, limit orders, automatic investment plans (DRIPs) and option exercise decisions around the ex‑date.
How prices and holdings adjust — formulas and worked examples
Key formula (basic parity)
– New shares outstanding = Old shares × (1 + bonus ratio)
– Adjusted price ≈ Old price ÷ (1 + bonus ratio)
Example A — simple investor holding shares
Assumptions: you own 200 shares at $40. Company issues a 1-for-4 bonus (25%).
– New shares = 200 × (1 + 0.25) = 250 shares.
– Approximate adjusted price = $40 ÷ 1.25 = $32.
– Market value before = 200 × $40 = $8,000. After ≈ 250 × $32 = $8,000. (Market cap is effectively unchanged, ignoring temporary supply/demand effects.)
Example B — larger ratio (2-for-1; 100%)
You own 50 shares at $120. Company issues a 2-for-1 (each share becomes 2).
– New shares = 50 × (1 + 1.0) = 100 shares.
– Adjusted price = $120 ÷ 2 = $60.
– Value before = 50 × $120 = $6,000; after = 100 × $60 = $6,000.
Notes and assumptions: market prices may move due to perception, liquidity, or tax considerations. The arithmetic parity holds at the moment of adjustment ignoring trading frictions and market reactions.
Options, futures and other derivatives — typical adjustments
– Options: In the U.S., the Options Clearing Corporation (OCC) adjusts option contract multipliers and strikes so option value is preserved. General rule: multiplier becomes 100 × (1 + bonus ratio), new strike = old strike ÷ (1 + bonus ratio). Example: one standard contract (100 shares) and a 1-for-5 bonus (20%): new multiplier = 120; new strike = old strike ÷ 1.20.
– Futures/forwards: exchanges or clearinghouses may change contract deliverable amounts or cash settlements; check exchange memos.
– CFDs and leveraged products: brokers may provide either a corporate action adjustment or a cash equivalent; confirm the broker’s policy.
Worked options example
You hold 1 call contract (100 shares) with strike $50. Company issues a 1-for-5 bonus (20%).
– New multiplier = 100 × 1.20 = 120 shares per contract.
– New strike = $50 ÷ 1.20 = $41.6667 (often rounded to a practical tick increment per exchange rules).
Parity maintained: previously the contract represented 100 × ($S − $50); after it represents 120 × ($S_new − $41.6667).
Accounting entries (high-level)
– A bonus (capitalisation) issue typically transfers an amount from reserves/retained earnings into share capital equal to the nominal/par value of the shares issued. If regulations require recording premium, some jurisdictions also move an amount to share premium.
– Example (assumptions): company issues 10,000 bonus shares, par value $1, market value $10:
– Transfer at par: Debit Retained Earnings $
10,000
– Credit Share Capital $10,000
If the company records the full market value of the issued shares (some jurisdictions or company policies require recognising the premium in equity), the entry would instead move the entire market value out of retained earnings:
– Debit Retained Earnings $100,000
– Credit Share Capital $10,000
– Credit Share Premium (Additional Paid‑in Capital) $90,000
Notes and assumptions
– “Par value” (nominal value) here is $1 per share; market value is $10.
– The first set of entries (par only) is the common legal approach: move the nominal amount to share capital and leave any remainder in reserves/retained earnings unless law or policy requires recording a premium. The second set shows the alternative where the company transfers total market value into equity accounts. Rules vary by jurisdiction and company charter.
Practical effects (what changes and what doesn’t)
– Total shareholders’ equity: unchanged by the bonus issue itself (no cash inflow/outflow), only its composition changes between retained earnings/reserves and share capital/share premium.
– Shares outstanding: increase (dilution in per‑share metrics). Ownership percentages remain proportionate across shareholders (no change in relative ownership) because all qualifying shareholders receive shares pro rata.
– Earnings per share (EPS): falls because the same earnings are spread across more shares. Example: Net income $200,000; shares before bonus 100,000 → EPS = $2.00. After a 20% bonus (shares = 120,000) → EPS = $200,000 / 120,000 = $1.6667.
– Dividends per share: if total dividend payout stays the same, DPS falls; companies sometimes adjust future dividend policy.
– Cash flows and solvency: unaffected immediately (no cash movement), but per‑share metrics change.
– Taxation: tax treatment of bonus shares varies by jurisdiction and circumstance; often not immediately taxable to shareholders, but consult tax authority or advisor.
Quick checklist — for company accountants
1. Confirm legal requirements: par value, authorised share capital limits, corporate charter, and local corporate law.
2. Decide whether to capitalise at par only or include a premium per regulatory requirements.
3. Prepare board/shareholder resolutions and update registers.
4. Post journal entries (examples above).
5. Notify regulators, exchanges, and clearinghouses so market instruments (shares, options, ADRs) are adjusted.
6. Communicate details to shareholders (record date, distribution ratio, new share class info).
Quick checklist — for investors and traders
1. Check the record date and entitlement ratio.
2. Expect more shares on your statement but the same proportional ownership.
3. Recompute per‑share metrics (EPS, DPS, book value per share).
4. For option holders: look up official exchange/OCC adjustments — contract multipliers and strike prices may change to preserve economic parity.
5. For tax questions, consult a tax professional.
Where to read authoritative guidance
– Investopedia — Bonus Issue / Stock Dividend overview: https://www.investopedia.com/terms/b/bonusissue.asp
– U.S. Securities and Exchange Commission (SEC) — Stock dividends and corporate actions explanations: https://www.sec.gov/fast-answers/answersstockdivhtm.html
– International Accounting Standards — IAS 33 (Earnings per Share) guidance, including treatment of bonus issues for EPS calculations: https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/
– The Options Clearing Corporation (OCC) — Corporate actions and options contract adjustments: https://www.theocc.com/Market-Data/Corporate-Actions
Educational disclaimer
This is educational information, not personalised investment advice. Rules and accounting treatments vary by jurisdiction and specific company documents; consult your accountant, tax advisor, or the relevant exchange/clearinghouse for authoritative instructions.