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Bonus Issue vs. Share Split: What is the difference?
There are many similarities between bonus shares and share splits.
In both the cases, the total number of outstanding shares goes up.
Share split and bonus shares both increase the good future outlook of the shares.
A company issuing a bonus share or splitting its shares shows a kind of promise to the shareholders that the future of the company is healthy and there would be no issues with profitability in the future.
However, there are differences in the way the bonus shares and the share splits are treated in accounting.
In case of bonus shares, the reserves and surplus capital goes down due to the transfer to the share premium and paid-up capital accounts. In such a case the par value of each share remains unchanged.
In case of a share split, the balance available in the equity accounts does not change. However, the par value of each share changes in the process.
It is noticeable that the very aim of the share split is to reduce the par value of each share. By the process of diminishing the par value, the companies make the shares more attractive and affordable for the investors. This is not the case with the bonus shares.
Bonus shares do not reduce the price of the par value of shares. Instead, it increases the number of outstanding shares with the same share values. This usually dilutes the premiums earned from each share. Therefore, while bonus share affects the earnings per share, the share split does not do so.
In case of bonus shares, the maximum ratio of issuance is 1:1, while in case of a share split, there is no standard fixed ratio. Therefore, while the increase in the number of shares in hand increases in a maximum ratio of 1:1 in the case of bonus shares, the increase in the number of shares in hand can increase at any ratio in the case of a share split.
While there are both similarities and differences between share split and bonus shares, both of the processes are meant to be of help to both the shareholders and the companies issuing the shares. Therefore, while there are some basic differences in operational procedures of the given two procedures, the ultimate aim of both is to manage the conflict between the mindsets of the shareholders and the companies.
It is notable that both share split and bonus shares need to be issued once a year. Thus, companies cannot change the pattern of increasing the outstanding shares every now and then. Both are standard policy that needs to be taken care of after critical analysis and observations.
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