InvestorQ : What are some basic things I need to know about a split versus a bonus issue?
Anamika Sodhani made post

What are some basic things I need to know about a split versus a bonus issue?

Answer
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Khushi Patel answered.
1 year ago


There are 3 fundamental points that you need to remember here.

Firstly, a split and bonus result in an increase in the number of shares outstanding and proportionate reduction in the market price. To that extent they are value neutral. That is because holding 100 share of Rs.50 is the same as holding 50 shares of Rs.100. The extent of impact depends on the ratio of the bonus / split.

Secondly, a 1:1 bonus is the same as a 10 for 5 stock-split at least in terms of the net wealth effect to the shareholder. In both the cases mentioned, the number of shares will double and the price of the stock will approximately halve. The only difference is that in case of bonus the funds actually get transferred from the reserves to the share capital whereas in case of stock split, the balance sheet remains the same with only the face value of the stock changing.

Lastly, neither the split nor the bonus will impact the total equity and therefore "Return on Equity" (ROE) and other valuation parameters will remain the same. That is because the ROE defines equity as share capital plus share premium plus free general reserves created out of profits. These don’t change in the case of bonus or in case of split.