What are bonus shares?
Bonus shares are additional free shares given to existing shareholders from a company's reserves, in proportion to their current holding.
Bonus shares are extra shares a company gives to its existing shareholders free of charge, in proportion to the shares they already own. Instead of paying cash, the company rewards shareholders by issuing new shares out of its accumulated reserves, converting retained profits into additional share capital.
On the PSX, bonus issues are quoted as a percentage of holdings (relative to face value). A "20% bonus" means you receive 2 new shares for every 10 you hold. If you own 1,000 shares, you would get 200 extra, taking your total to 1,200.
The key thing to understand is that a bonus issue, by itself, does not make you richer on day one. The company's total value has not changed — there are simply more shares representing the same business. So the share price adjusts downward proportionally. If a Rs 120 share issues a 20% bonus, the price will fall to roughly Rs 100 afterwards (since there are now 1.2 shares for every 1 before). Your number of shares rises, the price per share falls, and your total holding value stays about the same.
Why do companies issue bonus shares, then? Several reasons:
- Signalling confidence. A bonus often accompanies strong results and tells the market the company has healthy reserves and expects to keep growing into the larger capital base. - Improving liquidity. More shares at a lower price can make the stock more affordable and actively traded, widening its investor base. - Rewarding shareholders without spending cash. Unlike a cash dividend, a bonus conserves the company's cash for reinvestment while still giving shareholders more shares.
There can be a real benefit over time: if the company continues to grow its profits, you now own more shares that can each appreciate and earn future dividends. So while the immediate effect is value-neutral, a bonus from a genuinely growing company increases the base on which your future returns compound.
Like cash dividends, bonus shares have a book closure date that determines eligibility, and you must own the shares in time (allowing for T+2 settlement) to receive them.
Investors should not confuse a bonus issue with "free money." It is a reshaping of how the company's value is divided, valuable mainly as a sign of confidence and as a larger stake in a business that keeps growing.