Bonus issue When a company management decides to issue bonus

shares, it results in the increase of the company's share capital.

This increase in share capital is funded by the company's Reserves and Surplus (retained earnings in the balance sheet).

For example, suppose a company issued one lakh equity shares of face value of Rs 10, the company's share capital is Rs 10 lakhs.

Now, if the company wants to give a one-for-one bonus (1:1) to its shareholders, it has to generate another one lakh shares and transfer Rs 10 lakhs from its reserves and surplus account to share capital account.

Thus, the bonus is like 100 percent dividends as far as the company's reserve and surplus is concerned.

A bonus issue permanently increases the share capital of the company, and hence, implies that the company has to service the enlarged equity capital in line with future market expectations.

Bonus is treated as a company reward to the existing equity investors of the company. A bonus issue reflects the management's confidence in the future and gives a very strong signal in the market.

Stock split The concept of stock split came into the limelight a few

years ago when electronic holdings of stocks started in the demat format.

Historically, the face value of shares used to be Rs 10 (usually) or Rs 100 (for some stocks).

The prime reason was to maintain uniformity and avoid confusion and manual errors. With the adoption of the demat system, it became much easier to have and trade shares with multiple face value denominations.

However, as per the regulations, the face value should be in multiples of Re 1.

Usually, a company's management thinks of stock split when they want to increase the liquidity of shares in the market. When the market price of shares goes up quite a bit, it is difficult for the investors to buy even

small quantity of shares in the market. The company may decide to split the share's face value to increase the liquidity of shares, and hence a drop in price. When a share is split, say, from Rs 10 face value to Re 1 face value, there would be no impact on the company's share capital. The company's share capital and reserves remain unchanged.

However, the total number of shares increases. For example, if a company issued one lakh shares of face

value of Rs 10 each, the company's share capital is Rs 10 lakhs. Now, if the company split the face value to Re 1 per share, the total number of shares will be multiplied by 10 (that is, 10 lakh shares) but the paid up capital will still remain Rs 10 lakhs.

As a result of stock split, the number of shares (liquidity) increases in the market and hence the stock price falls eventually.

Sometimes, we see that the stock prices tend to rise after stock splits. This is because increased liquidity attracts more investors and also a stock split reflects the management's confidence that they foresee further price rise from the current levels.