What Is a Bonus Issue? Meaning, Ratio, Record Date & Price Impact Explained

What Is a Bonus Issue

A bonus issue is when a company gives its existing shareholders extra shares for free, in a fixed ratio, without asking them to pay anything or sell anything. If a company announces a "1:1 bonus," every shareholder gets one additional share for every share they already hold. The company isn't handing out cash from nowhere. It's converting its own accumulated profits (reserves) into share capital, then splitting that same ownership pie into more slices.

Key takeaway: A bonus issue increases the number of shares you hold, but not the total value of your holding. The company's overall worth hasn't changed, so the price per share adjusts down in exact proportion to the extra shares issued.

How a Bonus Issue Works

A bonus issue isn't something a company can simply decide and execute overnight. It follows a specific sequence, most of it laid out under Regulation 295 of SEBI's ICDR Regulations, 2018.

1. The board approves a ratio. The board decides how many new shares to issue for each existing share, expressed as a ratio like 1:1, 2:1, or 1:2. A 2:1 ratio means two new shares for every one already held.
2. The reserves have to be real. Companies can only fund a bonus issue out of free reserves built from genuine profits, or share premium collected in cash. Reserves created by revaluing fixed assets (marking up the book value of land or buildings on paper) can't be used, since that's not real, distributable profit.
3. A record date is fixed. Only shareholders who hold the stock as of the record date are entitled to the bonus shares. Buy after that date and you miss the allotment, even if you buy before the company technically finishes crediting the shares.
4. SEBI sets a tight implementation clock. Once the board approves the bonus, the company must implement it within 15 days, or within two months if it also needs shareholder approval to capitalize the reserves.
5. Shares get allotted, then start trading. New shares are credited to shareholders' demat accounts on the allotment date, and become tradeable a day or two after that.

Here's the part that actually explains the "free shares, same money" feeling. Say you hold 100 shares of a company trading at ₹300, so your holding is worth ₹30,000. The company announces a 1:1 bonus. After the record date and allotment, you hold 200 shares. Nothing else about the company changed between Tuesday and Wednesday, so the market simply re-prices each share at roughly ₹150. Your 200 shares at ₹150 are worth ₹30,000. Same money, split into twice as many pieces.

Why Does the Share Price Fall After a Bonus Issue

The price falls because the exchange mechanically adjusts it on the ex-date to account for the new shares, not because anything about the company got worse. NSE and BSE apply a standard, published formula for this. It comes down to simple division, not a market overreaction.

For a 1:1 bonus, the adjustment factor is (1+1)/1 = 2, so the price roughly halves. For a 2:1 bonus, the factor is (2+1)/1 = 3, so the price drops to roughly a third of what it was.

A real example makes this concrete. BSE Ltd fixed May 23, 2025, as the record date for its 2:1 bonus issue. The stock closed at ₹6,996.5 the previous session. On the ex-bonus date, it opened sharply lower, touching an intraday low of ₹2,335, before trading up about 1.14% to around ₹2,359 shortly after. Run the formula: ₹6,996.5 ÷ 3 works out to roughly ₹2,332, which is almost exactly where the stock actually opened. The "fall" here wasn't BSE losing two-thirds of its value overnight. It was the market doing the same division your calculator would, because there were now three times as many shares representing the same company.

This adjustment isn't limited to the cash market either. Futures and options contracts on the stock get adjusted too (strike prices divided by the same factor, lot sizes multiplied by it), so a trader holding derivatives positions doesn't end up arbitrarily better or worse off because of the corporate action.

For the same idea told as a real reader's story instead of a formula, see Why does a company's stock price fall when it announces a bonus issue, even though shareholders get more shares?

Bonus Issue vs Stock Split vs Dividend

These three corporate actions get confused constantly because all three can move a stock's price on a given date, but they work in fundamentally different ways.

Aspect	Bonus Issue	Stock Split	Cash Dividend
What happens	Company issues new shares from reserves	Existing shares are divided into smaller units	Company pays out cash from profits
Face value	Unchanged	Reduced in proportion to the split	Unchanged
Reserves used	Yes, genuine profit reserves or cash share premium	No, reserves are untouched	Yes, distributed as cash
Number of shares you hold	Increases	Increases	Unchanged
Cash leaving the company	None	None	Yes
Share price impact	Adjusts down proportionally	Adjusts down proportionally	Typically adjusts down by roughly the dividend amount

A bonus issue and a stock split can look identical from the price chart alone (both increase share count and cut the price proportionally), but a split also cuts the face value of each share, while a bonus issue leaves face value untouched and specifically uses up company reserves. A dividend is a different animal entirely: it's the one action here that actually takes cash out of the company and hands it to you, rather than just rearranging how your existing stake is sliced.

Are Bonus Shares Taxable?

Yes, but not at the moment you receive them. You don't pay any tax when bonus shares land in your demat account. The tax question only comes up later, when you sell.

Under Section 55(2)(aa)(iiia) of the Income Tax Act, the cost of acquisition for bonus shares is treated as Nil. Your holding period for these specific shares starts from the date of allotment, not from when you bought the original shares that earned you the bonus.

Say Priya bought 100 shares at ₹500 each two years ago (a ₹50,000 investment) and later received a 1:1 bonus, giving her 100 additional shares with a cost basis of ₹0. If she sells all 200 shares today:

• Gains on the original 100 shares are calculated against her actual ₹500 cost, using her original purchase date to determine the holding period.
• Gains on the 100 bonus shares are calculated against a ₹0 cost, using the allotment date to determine the holding period. If she sells them for ₹250 each, the entire ₹25,000 counts as gain.

For listed shares held more than 12 months, gains are taxed as long-term capital gains (LTCG) at 12.5%, with the first ₹1.25 lakh of such gains in a financial year exempt. Sell within 12 months instead, and it's taxed as short-term capital gains (STCG) at 20% under Section 111A, provided securities transaction tax (STT) was paid on the trade. These are the applicable rates for FY 2025-26 (AY 2026-27); Budgets 2025 and 2026 haven't changed them, but tax rules do get revised, so it's worth confirming the current rate before filing.

Common Misunderstandings