Stock Bonus Vs Stock Split

Well, after the announcement of Bonus issue by Ajanta Pharma, I have got this question from many, as to what are the differences between bonus share issued by the company and stock split. Hence I thought of covering that topic with example of our favorite stock, Ajanta Pharma.

To understand the similarities and differences between these 2 terms, it is very important to understand the meaning of company's share capital.

Company's Share Capital is number of shares issued by the company multiplied by the face value of each share. For eg., if a company issue 1000 shares with a face value of Rs 10 each, then the share capital of the company is 10000 Rs.

Stock Bonus:
When a certain company decides to give stock bonus, it eventually results in increase in the share capital of the company. This increase in share capital has to be paid from reserves & surplus of the company.
So, if in above example, the company decides to give 1:1 bonus, each investor will get 1 share as bonus per every share held by him. If he has 20 shares, he will now have 40 shares with him after bonus.
So, to give that extra shares to each investors, company has to generate another 1000 shares of face value 10 Rs each.
Hence the share capital of the company will now rise to 20000 Rs. Face value of the share is still 10 Rs, but number of shares in the market has doubled.
Issuing bonus share is like giving 100% dividend to its shareholders. This, in a way, reflects the confidence of management in the company.

Stock Split:
This is slightly different, in a way, that company does not have a pay any amount in case of stock split. The calculation is very simple.
In stock split, company decides to split the face value of each share.
For eg., in above case, company decides to split the face value of share from 10 Rs to 5 Rs each.
Hence the number of shares in the market will get doubled.
Earlier, we had 1000 shares of 10 Rs each. Now we will have 2000 shares of 5 Rs each.
So, the important thing to observe is that, here, the share capital of the company did not change at all.
1000 * 10 = 2000 * 5
Hence, company does not have to pay any amount to increase share capital in case of split, unlike bonus.
Split of shares is generally done, to increase liquidity in market. For eg., if we have a stock, which is of face value 10 Rs and current market price of 4000 Rs per share. Here, we would rather be hesitant in buying, as it is costly. So, management decides to split the share share into 1 Rs face value from 10 Rs. So the price of share will come to 400 Rs and number of shares in the market will be 10 times. Now we can expect some frequent trading in this stock.

In both the case, price is adjusted according to the ratio of split/bonus.

Lets now put both these events with Ajanta Pharma, as Ajanta Pharma split the stock from 10 Rs face value to 5 Rs face value last year in July, and now is about to consider issuing bonus share.
So, first of all, Share Capital of Ajanta Pharma is 11.80 Cr.
Hence when it came with 1.18 Cr shares of face value 10 Rs each.
Last year, in july, face value became 5 Rs per share, and number of shares in market went upto 2.36 Cr.
Hence Share Capital remained same at 11.80 Cr (2.36 * 5)

Now, if company decides to give a bonus of 1:1 this year, then the total number of shares will be 2.36 * 2 = 4.72 Cr, but with a face value of 5 Rs each, as earlier.
Hence Share Capital of the company after bonus will be 4.72 * 5 = 23.6 Cr.
So, this extra 11.8 Cr (23.6 - 11.8), will have to be paid by the company's reserves & surplus.

I hope I have made myself clear in this discussion.
Kindly put in your comments if you have any queries.