Both bonus and splits entail a small tweaking of your capital base. In case of bonus, the company issues fresh shares to the existing shareholders by capitalizing the profits held in the free reserves of the company. In case of stock split, just the par value (fair value) of the stock gets reduced proportionately. Let us look at this with a live case.

Bonus Issue

Details

Stock Split

Details

Share Capital

(25 lakh shares of Rs.10 each)

Rs.2.50 crore

Share Capital

(25 lakh shares of Rs.10 each)

Rs.2.50 crore

Reserves

Rs.5.00 crore

Reserves

Rs.5.00 crore

Total Equity

Rs.7.50 crore

Total Equity

Rs.7.50 crore

Bonus Ratio

1:1

Stock Split

Rs.10 to Rs.5

What happens after the bonus and the split?

Share Capital

(50 lakh shares of Rs.10 each)

Rs.5.00 crore

Share Capital

(50 lakh shares of Rs.5 each)

Rs.2.50 crore

Reserves

Rs.2.50 crore

Reserves

Rs.5.00 crore

Total Equity

Rs.7.50 crore

Total Equity

Rs.7.50 crore

Let us look at the company’s capital before and after the bonus issue. The share capital has increased but the reserves have reduced proportionately. Thus the net worth of the company remains the same. In the case of stock split, the share capital and reserves have remained the same. Instead, the number of shares has doubled and the par value of the stock has halved. Just to cite a story, if Wipro were to handle the growth and value creation without stock splits and bonuses, then each stock of Wipro will be quoting at Rs.5 crore. Something that will surely make Berkshire Hathaway blush!