In the Indian stock market, companies use various corporate actions to enhance shareholder value and improve stock liquidity. Two such popular corporate actions are Stock Splits and Bonus Shares. While both actions increase the number of shares available in the market, their implications, objectives, and legal procedures differ significantly.

This article explains the key differences between stock splits and bonus shares in India, detailing relevant legal provisions, processes, and frequently asked questions (FAQs).

Understanding Stock Splits and Bonus Shares

- Stock Split

A stock split is a corporate action where a company divides its existing shares into multiple shares to increase liquidity. Although the number of shares increases, the market capitalization and overall value of the investment remain unchanged. For instance, in a 2:1 stock split, each existing share is divided into two shares, halving the face value and share price.

- Legal Provision:

• Governed under Section 61 of the Companies Act, 2013, which allows companies to subdivide existing shares after obtaining shareholder approval.

• The company must amend its Memorandum of Association (MoA) and inform the Securities and Exchange Board of India (SEBI) and stock exchanges.

- Bonus Shares

Bonus shares are additional shares issued to existing shareholders without any additional cost, based on the number of shares already held. These shares are issued from the company's free reserves, securities premium account, or capital redemption reserve account.

- Legal Provision:

• Issuance is governed by Section 63 of the Companies Act, 2013.

• Must comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for listed companies.

• Bonus shares can only be issued out of free reserves or securities premium but not out of revaluation reserves.

• Requires approval from shareholders in the general meeting and subsequent filing of Form PAS-3 with the Registrar of Companies (ROC).

Key Differences Between Stock Split and Bonus Shares

Process of Implementing Stock Splits

• Board Approval: Pass a board resolution proposing the stock split.

• Shareholder Approval: Conduct an extraordinary general meeting (EGM) to get shareholder approval as per Section 61 of the Companies Act, 2013.

• Amend MoA: Amend the capital clause in the MoA to reflect the new share structure.

• Intimation to Stock Exchange: Inform SEBI and relevant stock exchanges about the split.

• Record Date: Announce a record date to determine eligible shareholders.

• Credit of Shares: The company’s registrar and transfer agent (RTA) will credit the new shares to shareholders' Demat accounts.

Process of Issuing Bonus Shares

• Board Approval: Pass a board resolution approving the bonus issue.

• Shareholder Approval: Obtain approval from shareholders via an EGM as per Section 63.

• Source of Bonus Issue: Ensure the bonus shares are issued from free reserves, securities premium, or capital redemption reserve.

• Intimation to Stock Exchange: Notify SEBI and relevant stock exchanges.

• Filing with ROC: File Form PAS-3 with the ROC within 30 days of the allotment.

• Credit of Shares: The company’s RTA will credit bonus shares to shareholders' Demat accounts.

Tax Implications

• Stock Split: No immediate tax implications. However, the cost of acquisition for capital gains calculation is adjusted according to the split ratio.

• Bonus Shares: No tax liability at the time of issue. However, when bonus shares are sold, capital gains tax is applicable. The cost of acquisition for bonus shares is considered zero, leading to a higher tax liability upon sale.

Frequently Asked Questions (FAQs)

- Why do companies opt for stock splits?

Stock splits are aimed at increasing liquidity by reducing the price of individual shares, making them more affordable to retail investors.

- Why are bonus shares issued?

Bonus shares are issued to reward shareholders by capitalizing reserves and to signal confidence in the company's growth prospects.

- Does a stock split affect my shareholding percentage?

No, a stock split increases the number of shares but maintains the same overall value and shareholding percentage.

- Are bonus shares taxable at the time of receipt?

No, bonus shares are not taxable when received but attract capital gains tax when sold.

- Can a company issue bonus shares from revaluation reserves?

No, as per Section 63 of the Companies Act, 2013, bonus shares cannot be issued from revaluation reserves.

- How does a stock split affect the face value of shares?

A stock split reduces the face value of shares in proportion to the split ratio. For example, a 1:2 split halves the face value of shares.

- Do stock splits and bonus issues impact market capitalization?

No, market capitalization remains unchanged post-stock split or bonus issue.

- How does a stock split impact share price?

The share price adjusts downward in proportion to the split ratio, ensuring the total investment value remains unchanged.

- What compliance is required for listed companies in case of bonus issues?

Listed companies must comply with SEBI's ICDR Regulations and make appropriate filings with stock exchanges.

- Can private companies issue bonus shares?

Yes, but they must comply with Section 63 of the Companies Act, 2013, and file necessary forms with the ROC.

Conclusion

Both stock splits and bonus shares are strategic corporate actions aimed at enhancing shareholder value. While stock splits focus on increasing market liquidity and making shares more accessible, bonus shares serve as a reward mechanism for shareholders by capitalizing on the company’s reserves. Understanding the legal framework under Sections 61 and 63 of the Companies Act, 2013 is critical for companies planning these actions.

For investors, being informed about these corporate actions helps in better financial planning and understanding their potential impact on investments. Whether it's participating in a stock split or receiving bonus shares, staying updated with company announcements and regulatory changes ensures smarter investment decisions.