A stock split is somewhat like a bonus -- in that when a Rs 10 stock is split into two Rs 5 shares, the number of shares you hold doubles at no cost to you. But that is where the similarity ends. A bonus is a free additional share. A stock split is the same share split into two. In a stock split, the number of shares increases but the face value drops. The face value never changes for a bonus shares. So a stock split is just a technical change in the face value of the stock. There is no other change in the company.
So, is the only difference between the two (stock split and bonus issue) the change in face value of the share?
Also please help me in understanding the following article,
Recently, Kwality Dairy, the Rs 600-crore food processing company, offered a 5:7 bonus to the shareholders other than the promoters. This resulted in a rise in the public holding to 25% from 16%.
How can the public increase its percentage holding (ownership of the company) without paying anything. (Bonus shares don't require the individual to pay, right?)
Or in other words, why would the promoters,= etc (who are not involved in the bonus issue) lose percentage ownership in the company without getting anything?
Hello there again,
I actually didn't read the 2nd page of the article - Cos likely to take 'public only' bonus route to raise public holding to 25% - Economic Times
which basically says this - "It is possible that public shareholders of a particular company are the entities acting as the fronts for the promoters but disguised as the public. In such a situation, bonus will benefit the promoters and will be misleading to the public," says Mr Haldea.
That statement reveals the hidden agenda of the promoters who may pose themselves as the public and benefit.
- arcus.
Good question, and I've been wanting to learn this too. Haven't found a satisfactory answer yet.
1. Why would a company give bonus shares to existing investors for free? It doesn't seem like there's a fixed pool of shares sitting idle with the company, that the company decides to dole out to shareholders and appease them often, they seem to be *creating* a new pool of shares just to dole out! Aren't you just diluting the company? Isn't it an eyewash? What are the consequences of a company NOT issuing bonus shares?
Govt wanted to increase the public holdings to 25% in the companies where it is less. For that, the promoters are likely to issue bonus shares only to public holdings, thereby, the public shareholders will get more shares and that will increase the % of their holdings, against promoter's holdings.
By issuing bonus shares, the reserves of the co. will come down equally. If the management feels that they can serve more equity, then they may convert a portion of accumulated reserves into bonus shares and issue. In other words, suppose, a co with Rs.5 crores as capital is having Rs.25 crores as reserves; if it issues 1:1 bonus, Equity will become Rs.10 crores and reserves will fall to Rs.20 Crores. If the company feels that even after post bonus issue, the company can show a good EPS, it may opt for going for bonus. If bonus is not issued, the reserves will go on getting accumulated and the book value of the share will be going on increasing, but the present shareholders may not enjoy the same. Whereas, if the co issues bonus at regular intervals, the present shareholders will enjoy the benefits.
... Whereas, if the co issues bonus at regular intervals, the present shareholders will enjoy the benefits.
Either way -- bonus shares issued or not -- the shareholder would *have to sell shares* to enjoy the benefits, right? It's not like a dividend wherein without requiring the shareholder to do anything at all, s/he gets money deposited in the bank.
Doesn't the share price normally fall, proportional to the ratio of the bonus:existing shares.... just as it does with a stock split?
normally, issue of bonus shows the confidence of the company management in showing more profits in the future. In simple terms, suppose a co is earning at an eps of Rs.10/- per share pre-bonus, and issues 1:1 bonus, the co may be confident, at least, it can earn Rs.7-8 per share post bonus.
if you take colgate, in earlier years, when 3 bonus issues were allowed in 5 years, they had declared the maximum bonus and their EPS and market price were also maintained at same level post bonus also.
Govt wanted to increase the public holdings to 25% in the companies where it is less. For that, the promoters are likely to issue bonus shares only to public holdings, thereby, the public shareholders will get more shares and that will increase the % of their holdings, against promoter's holdings.
I understand; however instead of increasing the public holding by giving shares to them free of cost i.e. by issuing bonus shares, they (the promoters etc) could have instead sold their existing shares to the public (thereby getting money for the lost percentage of ownership by the promoters).
Simply put, instead of giving some one something free; why not sell it to them and make money in the process, after all this is business right?
Difference Between Stock Split & Bonus Issue?
Linear Mode
