NISM-Series-XV: Research Analyst · Corporate Actions

Bonus Issues and Stock Splits for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

A bonus issue gives existing shareholders free extra shares by capitalising reserves. A stock split divides each share into more shares of lower face value. Both raise the share count and cut price per share and EPS proportionately. Market capitalisation and your total holding value stay unchanged, ignoring market reaction.

Understand Bonus Issues and Stock Splits

A bonus issue is a free allotment of new shares to existing shareholders in a stated ratio. The company pays for it by converting free reserves or the securities premium account into share capital. No cash comes in or goes out. A 1:1 bonus means one new share for every one share held.

A stock split (sub-division) cuts the face value of each share. A ₹10 share split into two ₹5 shares is a 1:2 split. Each holder gets twice as many shares. The company's total paid-up capital does not change, because the number of shares rises while face value falls in the same proportion.

In both cases the company is cut into more pieces, but the business is the same size. So the price per share falls, EPS falls and book value per share falls, all in proportion to the rise in share count. Your total holding value and the company's market capitalisation stay the same, in theory. Actual prices can move because of market sentiment and liquidity.

The key difference is in the balance sheet. A bonus issue moves money from reserves to share capital, so paid-up capital rises and reserves fall. A split changes only face value and share count, so capital and reserves stay the same. Face value changes in a split but not in a bonus. Neither action changes total net worth.

Analysts adjust historical prices and per share data for both actions. Otherwise charts show a false crash and EPS trends look broken. Always read the ratio carefully: bonus ratios are quoted as new:held, and split ratios are quoted as old face value to new face value.

Key formulas to remember

Share count after bonus: New shares = old shares × (1 + a ÷ b), for a bonus of a:b (a new shares for every b held); A 1:1 bonus doubles the count. A 2:5 bonus multiplies it by 1.4.
Adjustment factor for bonus: Factor = (a + b) ÷ b; Divide old price, EPS and DPS by this factor. Multiply old share count by it.
Ex-bonus price: Ex-bonus price = cum-bonus price × b ÷ (a + b); Theoretical price, assuming market cap is unchanged.
Split factor: Factor = old face value ÷ new face value; A ₹10 to ₹2 split gives a factor of 5, so shares rise five times.
Post-split price and EPS: New price = old price ÷ factor; new EPS = old EPS ÷ factor; Book value per share and DPS adjust the same way.
Market capitalisation: Market cap = price × number of shares; Unchanged by a bonus or split in theory.
Effect on paid-up capital: Bonus: capital rises by new shares × face value, reserves fall by the same amount. Split: capital and reserves unchanged.; Net worth is unchanged in both.

How to solve Bonus Issues and Stock Splits questions

Use one method for any bonus or split question. Work with the factor, not with guesses.

1Identify the action: bonus (free shares from reserves) or split (face value reduced).
2Read the ratio carefully. For a bonus, a:b means a new for every b held. For a split, note old and new face value.
3Compute the factor: (a + b) ÷ b for a bonus, or old FV ÷ new FV for a split.
4Multiply share count by the factor. Divide price, EPS, DPS and book value per share by the factor.
5Check that market cap and total holding value are unchanged. Ignore sentiment unless the question states it.
6For balance sheet questions, apply the bonus to capital and reserves. For a split, only change face value and share count.
7Match the result to the options and watch for the reverse trap, such as price multiplied instead of divided.

Quickest way: Factor shortcut

When to use it: Use it for any numeric question on price, EPS or share count after a bonus or split.

Write the factor first, such as 3:2 bonus means for every 2 held you get 3, so factor = (3 + 2) ÷ 2 = 2.5.
Shares go up by the factor. Per share values go down by the factor.
Quick sanity check: price × shares must equal the old market cap.
For a bonus, capital moves from reserves. For a split, nothing moves on the balance sheet except face value and share count.

Common mistakes in Bonus Issues and Stock Splits

Treating a 1:1 bonus as a 1:2 split or the reverse.
Both double the share count, so they look the same.
Fix: Ask what changes. If face value changes, it is a split. If reserves turn into capital, it is a bonus.
Using a:b as total shares after the bonus instead of new shares.
A ratio like 2:5 is misread as 2 total for 5.
Fix: Bonus ratio is new:held. Factor = (a + b) ÷ b.
Saying a split increases paid-up capital.
Students link more shares with more capital.
Fix: In a split, shares rise but face value falls in proportion, so paid-up capital is unchanged.
Saying a bonus issue changes face value.
Confusion with splits.
Fix: Face value stays the same in a bonus. Only the number of shares rises.
Claiming shareholder wealth rises after a bonus or split.
Holders see more shares and assume more value.
Fix: Holding value is unchanged in theory. Price falls in the same proportion as shares rise.
Forgetting to adjust past EPS and price series.
Students compute growth using unadjusted data.
Fix: Adjust all history by the factor before comparing periods.

Worked examples

Example 1

A company announces a 1:2 bonus (one new share for every two held). The cum-bonus price is ₹300 and EPS is ₹30. What are the theoretical ex-bonus price and EPS?

Show the solution

Bonus ratio a:b = 1:2, so a = 1 and b = 2.
Factor = (1 + 2) ÷ 2 = 1.5.
Ex-bonus price = 300 ÷ 1.5 = ₹200.
Adjusted EPS = 30 ÷ 1.5 = ₹20.
Check: 100 old shares worth ₹30,000 become 150 shares at ₹200 = ₹30,000.

Answer: Ex-bonus price ₹200 and EPS ₹20.

Example 2

A company has 50 lakh shares of face value ₹10, trading at ₹1,000, with EPS of ₹50. It splits each share into shares of face value ₹2. Find the new share count, price, EPS and market capitalisation.

Show the solution

Factor = 10 ÷ 2 = 5.
New share count = 50 lakh × 5 = 2.5 crore shares.
New price = 1,000 ÷ 5 = ₹200.
New EPS = 50 ÷ 5 = ₹10.
Market cap before = 50,00,000 × 1,000 = ₹5,00,00,00,000 (₹500 crore). After = 2,50,00,000 × 200 = ₹500 crore, unchanged.

Answer: 2.5 crore shares, price ₹200, EPS ₹10, market cap unchanged at ₹500 crore.

Exam tips

Questions often ask which item does not change. Remember: market cap, net worth and total holding value stay the same in theory.
Expect a direct comparison: only a bonus uses reserves, and only a split changes face value.
Compute the factor before reading the options. It removes most trap choices.
Check whether the ratio is given as new:held for a bonus. Misreading it is a common loss of marks.
With 25% negative marking, skip a numeric question only if you cannot set up the factor. Most take under a minute.

Practice questions from Corporate Actions

Bonus Issues and Stock Splits in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bonus Issues and Stock Splits: frequently asked questions

What is the difference between a bonus issue and a stock split?

A bonus issue gives free new shares by converting reserves into share capital, and face value stays the same. A split reduces face value and increases the share count, with no change in reserves or paid-up capital. Both lower the price per share and EPS.

How do you adjust the share price after a bonus issue?

Divide the cum-bonus price by (a + b) ÷ b, where the bonus is a:b. For a 1:1 bonus the price halves. For a 1:2 bonus the price is divided by 1.5.

Does a stock split change EPS and market capitalisation?

EPS falls in proportion to the split factor because there are more shares for the same profit. Market capitalisation is unchanged in theory, since price falls as the share count rises.

Do bonus shares and splits create wealth for investors?

Not by themselves. The company's value does not change, so total holding value stays the same. Any price rise seen in practice reflects market sentiment or improved liquidity.