Why Has Average Price Reduced After Receiving Bonus | Motilal Oswal

Why Has Average Price Reduced After Receiving Bonus


Investment in the stock market is full of ups and downs, like a roller coaster ride. Investors need to go through such a bumpy ride as they aim for maximum returns. However, it is important to remember that inflation can erode the value of your returns over time, so you need to make sure that your investments are growing at a rate that is higher than inflation. You can use an inflation calculator to see how much your returns will be eroded by inflation.

Amidst this exciting journey, investors must grasp the intricacies of different financial instruments. One such instrument is bonus shares.

Have you ever wondered what bonus shares are and how they work? Well, buckle up because this blog post will take you on a captivating ride through the world of bonus shares, unravelling the mysteries and shedding light on their significance for both companies and investors.

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What are bonus shares? 

Bonus shares refer to extra shares provided to current shareholders without additional charges. A company issues more shares based on each shareholder's number of shares.

The primary objective of issuing bonus shares is to increase the company's share capital. When a company declares a 1:1 bonus issue, the number of shares effectively doubles. 

Why does the average price reduce after receiving a bonus? 

When bonus shares are allotted, the share prices tend to experience a significant decline proportional to the number of bonus shares issued. It's important to note that despite this decrease, the company's market capitalization remains unchanged while the number of outstanding shares increases. Let's consider an example to better understand this concept. Suppose a company's shares are currently traded at Rs. 200 with 20 lakh shares outstanding, resulting in an equity share capital of Rs. 20 crores. If the company declares a bonus issue in a 1:1 ratio, the market capitalisation remains unaffected, but the number of shares doubles to 40 lakhs, leading to a decreased price per share of Rs. 100. Estimate your retirement benefits with gratuity calculator

What will be the impact of the decrease on investors?

When bonus shares are issued, the total number of shares in circulation increases. When extra shares are given, it decreases the value of each share, driving the share price to decrease equally. This adjustment is necessary to maintain a fair valuation for the company.

So, if you see a decrease in the share price after the issuance of bonus shares, don't be scared. It's simply a reflection of the increased number of shares in the market. The intrinsic value of your holdings as an investor remains the same, even though the share price has adjusted to accommodate the additional shares. This ensures that the market remains balanced and takes into account the expanded shareholder base.

Tax implications of bonus shares

Situation Tax Treatment
Receiving bonus shares No tax is applicable when receiving bonus shares.
Selling original shares/Selling bonus shares Short-term capital gains are taxed at a rate of 15%.
Long-term capital gains exceeding Rs 1 lakh are taxed at a rate of 10%.
Set-off of capital losses Losses from selling investments quickly can be used to reduce taxes on quick profits.
Losses from selling long-term investments can only be used to offset taxes on long-term profits.
Holding period for bonus shares The holding period for bonus shares starts with the original shares' allotment date.

Under the new regulations, if an investor buys shares within three months prior to the record date of a bonus issue and sells or transfers all or part of the original shares within nine months after the record date, the loss arising from such transactions will be ignored while calculating capital gains tax. Instead, the entire loss amount will be considered as the cost of acquisition for the bonus shares. These regulations aim to prevent investors from taking advantage of bonus stripping for tax benefits.


A clear understanding of bonus shares is essential for investors to navigate the stock market successfully. By grasping the concept, considering factors that influence issuance, and being aware of tax implications, investors can make informed decisions and maximize their investment potential. Stay knowledgeable, stay confident, and adapt to the ever-changing landscape of the stock market.


Can bonus shares be sold immediately after receiving them?

Yes, bonus shares can be sold immediately after receiving them. However, the taxation will vary on the basis of the holding period and the nature of capital gains (short-term or long-term).

Are bonus shares subject to dividend payments?

As bonus shares are issued in lieu of cash dividends, shareholders don't get any dividend payments during the bonus issue.

Are bonus shares be issued by all companies?

No, not all companies choose to issue bonus shares. When a company considers issuing bonus shares, there are multiple factors they take into consideration before making a decision, such as the company's financial performance, capital requirement, and the preferences and interests of their shareholders. By carefully evaluating these aspects, the company aims to make a well-informed choice regarding the issuance of bonus shares.

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