Difference between a Stock split and Bonus

Stock split and bonus issue are two of the most common corporate action carried out by companies. Most shareholders assume that these corporate actions are similar, understandably so, because the end result is the same i.e. the number of shares you hold increases after the corporate action.

However, you need to look at these corporate actions from a balance sheet perspective to figure out the difference between a bonus issue and a stock split. I've prepared an illustration to help you understand this better:

Particulars	Current	Split	Bonus
Face Value	10	5	10
Share Capital	15,000,000	15,000,000	30,000,000
Reserves & Surplus	100,000,000	100,000,000	85,000,000
Outstanding Shares	1,500,000	3,000,000	3,000,000
Net Profit	7,500,000	7,500,000	7,500,000
Earnings per share	5	3	3
Stock Price	50	25	25
Market Cap	75,000,000	75,000,000	75,000,000
Price to Earning	10	10	10
Dividend %	50%	50%	50%
Dividend per share	5	2.50	5

Assume there are two identical companies, one splits the shares (1:2) and another issues bonus shares (1:1). Here is what happens after these corporate actions are rolled out: 

• Face value reduces in split, remains the same in bonus.
• Share capital stays the same in split, doubles in bonus. Notice, the share cap increase by 1.5 Cr.
• The funds flow from the reserves and surplus (R&S) to share capital, both are on the liabilities side of the balance sheet, hence the balance sheet remains balanced. In this case, 1.5 Cr flows from R&S to share capital.
• Outstanding number of shares increases in the same proportion.
• Assume the net profit is 75 L, earning per share (EPS) is impacted in both cases in similar proportion.
• Stock price reduces in both cases, the market cap stays the same.
• Price to earning stays the same, so no change in valuations.
• Assume the company pays a 50% dividend, then the dividend per share reduces in split, but remains the same for bonus. 

So the bonus issue is equity dilution, while split does not dilute the equity.

Happy investing!