Can anyone please give a detailed answer on what are the tax, price and accounting implications for a company to do a 1:1 split versus 1:1 bonus issue ? For a holder, the price action is same - so what causes a company to choose one versus another ?
SPLIT means no change in serviceable equity capital of company ,no effect on reserves of company but only increase in quantity of shares with reduced face value. split is allowed in rs only like TCS can not do split as it is already 1 rs face value. change in ISIN.
Bonus means increase in serviceable equity of company and reduction in reserves.face value remain same with extra quantity of shares in hand but burden of increased equity for company.no change in ISIN.
When share price is too much, a company decide to split its share so that there will be more liquidity in the market. In bonus case company rewards the investors with more shares so that in future share holders can get more dividends.
When a company splits it’s shares of say Face value of 10 into Face value of 2 , you will now get 5 shares in place of the 1 share that you held, subsequently the share price also adjusts in the ratio of the split and as such there is no value addition to your wealth.
Eg Abc company’s share price is 1,000 with face value of 10, now if the company decides to change the face value to 2, you will get 5 shares instead of 1 share, but the price will now become 200, so your wealth remains the same i.e 1,000.
Tax impact- You are not allotted new 4 shares, your are just allotted 5 shares instead of 1 , so your cost of acquisition has to be adjusted in the same ratio as the split ration to arrive at correct cost.
In case of Bonus , there are 2 differences as compared to split, one is the company has to reduce it’s reserves by the same amount as the bonus, how does it impact an investor? the company could have used this amount to pay dividends or buyback shares, which they can no longer do.
second difference is tax implication- the extra 4 shares are considered as new shares and their date of purchase is the date on which the bonus shares are credited to the demat account and their cost is also considered as zero.
The answer is clearly given by other respondents above, but you don’t want to understand it. The consideration depends on the objective of the company. The objective behind split and bonus both are explained above clearly.
As a CFO of a company i would prefer stock split as compared to bonus shares , as that would keep my reserves intact for distribution in case i need them. But there is a limitation to the amount of splits a company can do as every time a company splits it’s shares the face value is also reduced and as per SEBI guidelines a listed company cannot have a face value below Rs 1.
So Avanti is splitting the shares in the ration 2:1 to make the face value of 1 and then they are also issuing bonus(1:2) as they cannot further split the shares resulting in overall 3 shares for 1 share held.
First let’s look at the impact of split and bonus on shares outstanding and share price:
Shares Outstanding: Under both split and bonus issues will lead to an increase in the number of shares outstanding
Stock Price: Under both after issuance of bonus or split, share will be adjusted by the additional number of shares issued by company.
Under bonus issue, free or bonus shares are issued to existing shareholders in the ratio declared by transferring the amount under the Reserve (Balance Sheet) head to Share Capital (Balance Sheet).
As the shares are issued without taking money from shareholders, this will lead to increase in shares outstanding without transfer of resources between shareholders and company. This increase in shares will lead to decrease in EPS and share price in the same ratio in which bonus shares are issued.
If company declare the stock split, company intends to decrease the price by dividing the face value of share into smaller parts thus leading to increase in shares outstanding.
Both the bonus and stock split does not create additional wealth as under both shares number have increased and consequently share price is reduced in the ratio of bonus and split.
To understand in a layman language:
Bonus is giving more burger for the same price of one and split means dividing one burger into many pieces.