Hi,
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 ?
I think one of them reduces the face value of stock, other doesnt
Yeah - so who cares ?
Yes as far as i know from investors perspective both shud be similar
But let some other expert also chip in
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.
Yeah again - who cares if the serviceable equity is higher or lower ? Why would a company choose one over the other ?
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.
Dosent make sense. In both cases the number of tradeable shares and dividend per share will be the same.
Split
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.
Bonus
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.
@Baniya: I know all this. My question is from the Company’s perspective. Why will a company choose to issue 1:1 bonus compared to 1:1 split. What are their considerations ?
Also, with LTCG, in case of bonus, there will be no net capital gains at issue ?
Anybody here who can satisfy Bannerjee jee?
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.
best example is TCS which has a face value 1 so can not split .Avanti feeds had split from 10 to 2 in year 2015 and now in year 2018 split from 2 to 1 .now more split possible for these companies.
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.
yes and also dividend of rs 6 per share on face value 1 which is 12 per share on present face value so it is cum split cum bonus cum dividend.
So at last you agreed to understand unlike Mamata Bannerjee.
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.
Bonus Share:
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.
Stocks Split:
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.
Thanks
Bhuvan
Twitter @bhuvanahuja
!