Contents
Definition
A Bonus Issue (also called a scrip issue or capitalisation issue) is the distribution of additional shares to existing shareholders, free of cost, in proportion to their existing holdings, funded by capitalising a company's free reserves, securities premium account, or capital redemption reserve. Governed by SEBI ICDR Regulations 2018 (Chapter VIII) and Section 63 of the Companies Act 2013, a bonus issue converts accumulated reserves into paid-up share capital. A 1:1 bonus doubles the share count; a 1:2 bonus increases it by 50%. Market capitalisation is unchanged at announcement — the share price adjusts in proportion to the new share count on the ex-bonus date.
Mechanics & Timeline
- Board recommendation: Board recommends bonus ratio subject to availability of sufficient free reserves (ICDR Reg. 292 — no bonus from revaluation reserves).
- Shareholder approval: Ordinary resolution in general meeting (or postal ballot).
- SEBI/exchange notification: Company notifies BSE/NSE with record date (minimum 2 working days' notice to exchanges per SEBI LODR Reg. 30).
- Record date: Shareholders on record on this date receive bonus shares. Shares trade ex-bonus from the record date.
- Credit of bonus shares: Within 2 working days of record date — directly credited to Demat accounts. No application required by shareholders.
- Price adjustment: Exchange adjusts theoretical ex-bonus price = (pre-bonus price × existing shares) ÷ (existing + new shares).
Between board recommendation and record date, the share typically trades "cum-bonus" — the upcoming bonus is priced into the market. After ex-date, trading resumes at the adjusted (lower) price.
Tax Treatment
- At issue: Receipt of bonus shares is not taxable at the time of allotment — no income tax event (Section 55(2)(aa) of the Income Tax Act treats cost of bonus shares as nil).
- On sale of bonus shares: Cost of acquisition = ₹0. Entire sale proceeds = capital gain. STCG at 20% u/s 111A if sold within 12 months; LTCG at 12.5% u/s 112A (above ₹1.25 lakh per FY) if held ≥ 12 months.
- Holding period for bonus shares: Commences from the date of allotment of bonus shares (not the original share purchase date).
- Original shares: Cost basis of original shares is unchanged by the bonus issue; only the share count increases.
Investor Protection
- Reserve adequacy check: ICDR Reg. 292 prohibits bonus issues from revaluation reserves — only genuine distributable free reserves qualify, preventing artificial capitalisation.
- No cash outflow for company: Bonus shares are funded from existing reserves — unlike dividends, the company does not need to generate new cash, reducing financial risk.
- Pro-rata guarantee: All shareholders receive bonus shares proportionally — no discretion or selective allocation.
- Lock-in: Bonus shares issued on locked-in pre-IPO shares remain locked in for the unexpired period of the original lock-in under ICDR Reg. 167(7).
- LODR disclosure: Board recommendation and record date must be disclosed within 30 minutes of board meeting under SEBI LODR Reg. 30.
Worked Example
Hindustan Unilever (HUL) Bonus Issue — 2018:
- Ratio: 1:1 (1 bonus share for every 1 share held).
- Record date: August 9, 2018.
- Pre-bonus share price (approx.): ₹1,800. Theoretical ex-bonus adjusted price: ₹900.
- Shares issued: Approximately 209 crore bonus shares on a base of ~209 crore existing shares, doubling the share count to ~418 crore.
- Reserves capitalised: HUL capitalised ₹209 crore from its securities premium account (face value ₹1 × 209 crore new shares).
- Outcome: HUL's market cap was unchanged at announcement. Existing shareholders held 2× the shares at ~½ the price per share — economically neutral. Post-bonus, improved affordability and liquidity (lower share price attracts wider retail participation).
See Also
Primary Source
SEBI ICDR Regulations 2018, Chapter VIII — sebi.gov.in; Companies Act 2013, Section 63 — mca.gov.in
MintByte is registered with SEBI as an Investment Adviser (ARN-314872) and APMI (APRN-01658). This glossary entry is for educational purposes only and does not constitute investment advice.