What are bonus shares?

Bonus shares are issued to the existing shareholders by converting free reserves or share premium account to equity capital without taking any consideration from investors.

What is share split?

Share split reducing the face value of the share (for eg:the face value of the share is 10 reducing it to 2) and issuing proportionate number of new shares of the new face value to the shareholders so that proportionate holding remains unchanged. Share split is mainly done for those shares whose market prices are more but the trading volume is less.

  • Splits and bonus are like a divided corporate pie whose sum is larger than the original pie
  • Since Jan 2009 out of 78 companies which announced splits 61 are trading above price post split. Median excess return of this scrip’s over SENSEX was 23%. KGN Industries at current market price of Rs 367 has gained 702%
  • Out of 51 companies which announced bonus 42 are trading above post bonus. Median excess over SENSEX was 28%. Linkson International which announced 2:1 bonus is trading at Rs 148.8, a gain of 659%
  • Out of 17 companies which have announced both split and bonus, 13 are trading above their post split-bonus price
  • However one should be careful  before investing in split or bonus shares as some have given negative returns in2009

 

Author: Rahul Sonthalia, Research Head, Kredent