# Bonus and Split ratios

I don’t understand this bonus & split ratios. If the ratio is 10:8, does it mean I’ll get 10 shares for 8 or 8 for 10 or what? How does this effect my holdings?

Hi Sameer,

Bonus shares are the additional shares given by the company to its share holders to attract investment. In this case the face value of the shares remains unchanged.

In case bonus is announced as 10:8 means you receive 10 shares for every 8 shares holding in your demat account. So if you are holding 16 shares in your demat account you will receive 20 additional shares and total holding becomes 36 shares. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

A corporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same compared to pre-split amounts, because the split did not add any real value. The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares for every share held earlier.

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For a 10:8 bonus ratio, you get 10 additional shares for every 8 shares you hold in your demat account.

So if you hold 80 shares, you will get 100 additional shares.

What happens if you hold 102 shares?

102/8= 12.75 when multiplied 10 times, you get 127.5 shares (127 full shares and a 0.5 fractional share) on addition to the existing 102 shares.

To know more about fractional shares, read this

http://www.indiainfoline.com/article/research-articles/what-is-a-fractional-share-35276472_1.html

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You should be careful with Stock Split ratio which is little different.

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Ex. A stock split of 10:8 means, you will get 10 shares instead of 8 shares, you held in your demat account.

Before split: you held 8

After split: you will hold 10

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In case of bonus issue of 10:8

Before bonus: you held 8

After bonus: you will hold 18

A bonus is a free additional share. A stock split is the same share split into two.

Usually companies accumulate it’s earnings in reserve funds instead of paying it to share-holders in form of dividend. This accumulated reserve fund is then converted into share-capital and allotted to share-holders as bonus shares in proportion to their existing holding. So, Share-capital of the company increases with a concomitant decrease in its Reserve profits. Share-holders get bonus shares in compensation of dividend.

For instance :a company has an authorized share capital of Rs. 1,00,000. It has issued 10,000 shares with a face value of Rs. 10 each. Thus, its issued share capital is also Rs. 1,00,000.It has an accumulated reserve of Rs. 10,00,000. It decides to issue bonus shares in the ratio of 1:1 or “1 for 1” – that is, 1 bonus share for each share held. In this case, it transfers Rs. 1,00,000 from its reserves to its authorized share capital. Thus, its reserves come down to Rs. 9,00,000, and its authorized share capital increases to Rs. 2,00,000.Using this new share capital of Rs. 1,00,000, the company issues 10,000 new shares, each having a face value of Rs. 10, and gives a new share – the bonus share – for each share held. Its issued share capital also goes up to Rs. 2,00,000.​

When a share is split, say, from Rs 10 denomination to Re 1 denomination, there would neither be an increase in the share capital nor a concomitant decrease in the reserves of the company. This is because while in a bonus issue a person having one share of Rs 10 face value would get another share of the same face value should the company go for a 1:1 bonus what would happen in a stock split is his one Rs 10 share would now be converted into ten Re 1 shares.

for instance : if EPS (Earnings Per Share​ ) is Rs. 15 per share for a share having a face value of Rs.10, after a 10:1 stock split, the EPS would come down to Rs. 1.5. But since you would be holding 10 shares now, your share of EPS remains the same: Rs. 1.5 * 10 shares = Rs. 15, which is as before. So, if the PE ( Price earning ratio) of the stock is 20 in our example, the price would go down from Rs. 300 (EPS of Rs. 15 * PE 20 = Rs. 300 per share) to Rs. 30 (EPS of Rs. 1.5 * PE 20 = Rs. 30 per share). But again, since you would be holding 10 shares now, your actual holding remains the same: Rs. 30 * 10 shares = Rs. 300, which is as before!

In bonus issue, the capital of the company increases and the reserves decreases. While in a stock split, the capital of the company remains same. However, in both cases, the net worth of the company remains unchanged. so bonus and split ratios do not affect the value of the share, but it affect the quantity of the shares .

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@pcp
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What happens if the split ratio is 2:5 and I am holding only 1 share? On the ex-split date, I will loose share price, but the loss is not refunded anywhere right? Is it my responsibility to have round number of shares to be eligible for split/bonus?