Corporate Actions That Change Your Shareholding — Without You Doing Anything (Mostly)
As a shareholder, you will encounter corporate actions that change the number of shares you hold, the per-share price, or require you to make a decision and invest more money. Three of the most common are bonus shares, stock splits, and rights issues.
Each one is fundamentally different in what it means for the company and what it requires from you. Getting confused between them — or panicking when your stock suddenly drops 50% on a split day — is a common beginner mistake.
This guide explains all three in plain language: what each is, why companies do it, how it affects your portfolio, what action (if any) you need to take, and the tax implications in India.
1. Bonus Shares — Free Shares from Company Reserves
What Are Bonus Shares?
Bonus shares are additional shares that a company gives to its existing shareholders for free, in proportion to their current holding. They are issued by converting the company's free reserves (accumulated profits or share premium account) into share capital.
Bonus ratio notation: X:Y means you get X bonus shares for every Y shares you currently hold.
1:1 bonus — For every 1 share, you get 1 bonus share (holding doubles)
2:1 bonus — For every 1 share, you get 2 bonus shares (holding triples)
1:2 bonus — For every 2 shares, you get 1 bonus share (holding increases 50%)
Price Adjustment After Bonus
The share price adjusts proportionally on the ex-bonus date. If a stock was at ₹1,000 and a 1:1 bonus is issued, the price adjusts to ₹500. You now have twice as many shares at half the price — total value is identical on the day of issue.
New Share Price = Old Price × Y / (X + Y)
For a 1:1 bonus: New Price = ₹1,000 × 1 / (1 + 1) = ₹500 | For a 2:1 bonus: New Price = ₹1,000 × 1 / (2 + 1) = ₹333
Why Companies Issue Bonus Shares
Signal of confidence: Companies with strong accumulated reserves issue bonuses to signal healthy financial position
Capitalise reserves: Converts free reserves into paid-up capital, which cannot be easily withdrawn — seen as a permanent commitment
Improve liquidity: Lower per-share price makes the stock more accessible to smaller investors and increases trading volumes
Reward shareholders: A tax-efficient alternative to dividends — no immediate tax liability for shareholders at the time of bonus issue
Psychological effect: Investors often react positively to bonus announcements, sometimes causing pre-bonus price appreciation
Recent Indian Examples
Several prominent Indian companies have issued bonuses in recent years — Infosys has issued multiple bonuses historically, Bajaj Auto issued a 1:1 bonus, and many FMCG companies have used bonuses to improve retail investor participation.
Tip: Check the ex-bonus date in your broker's app
When you see your stock price "crash" by 50% overnight, always check if a bonus or split was announced. Your broker should flag this. Your total portfolio value in rupees should remain the same — only the per-share price and number of shares change. Do not panic-sell on the ex-bonus date.
2. Stock Split — Same Company, More (Cheaper) Shares
What Is a Stock Split?
A stock split divides each existing share into multiple shares. The face value of the share is reduced proportionally. Unlike bonus shares (which capitalise reserves), a stock split does not involve any reserves — it simply redenominates the shares.
Split ratio notation: 1:N means each 1 share becomes N shares (some companies use the reverse notation — always verify).
1:2 split — Each share becomes 2 shares; price halves; face value halves
1:5 split — Each share becomes 5 shares; price becomes 1/5th; face value becomes 1/5th
MRF (Madras Rubber Factory) was trading at over ₹1,25,000 per share — making it the highest-priced stock in India. Many retail investors could not afford even one share at that price. A stock split would bring the per-share price down to an accessible range. In contrast, Reliance has undertaken splits historically to keep shares accessible.
Why Companies Split Stocks
Improve affordability: A ₹50,000 stock is inaccessible to most retail investors; splitting to ₹500 expands the investor base
Increase liquidity: More shares at lower prices generally means higher trading volumes
Psychological appeal: Lower priced shares (even if economically equivalent) attract more buyers
Pre-requisite for index inclusion: Some indices have liquidity thresholds that are easier to meet with a split
Tip: Distinguishing Bonus from Split
Both bonus shares and stock splits increase your share count and reduce per-share price. The key difference: a bonus share is funded by the company's accumulated reserves (money leaves reserves, enters share capital), and does NOT change the face value per share. A stock split reduces the face value proportionally and does NOT use any reserves. Your broker's corporate action notification will specify which it is.
3. Rights Issue — Company Asks You to Invest More
What Is a Rights Issue?
A rights issue is fundamentally different from bonus shares and splits — it is not a gift. A rights issue is an invitation to existing shareholders to buy additional new shares at a discounted price, in proportion to their current holding, before the offer is made to the general public.
Rights ratio notation: X:Y means you have the right to buy X new shares for every Y shares you currently hold.
Example
Reliance Industries conducts a rights issue in ratio 1:15 at ₹1,257 per share when the market price is ₹2,000. For every 15 shares you hold, you have the right to buy 1 new share at ₹1,257 — a discount of approximately 37% to market price. If you hold 150 shares, you can buy 10 new rights shares at ₹1,257 each (₹12,570 total investment).
The rights entitlement is itself listed and tradeable on the stock exchange for a few days during the rights issue period, typically at a price reflecting the discount value (market price minus issue price).
Your Three Options in a Rights Issue
Subscribe fully: Apply for all the rights shares you are entitled to. This maintains your percentage ownership of the company and you benefit from the discounted price.
Sell your rights entitlement: If you do not want to invest more but do not want to lose value entirely, sell your rights entitlement in the market during the trading window. You receive cash for the discount value.
Do nothing (lapse): If you neither subscribe nor sell your rights, the entitlement lapses and you lose the discount value. Your shareholding gets diluted as the company issues shares to others. This is the worst option and should be avoided.
Why Companies Issue Rights
Raise capital from existing, known shareholders — without needing SEBI approval for a fresh IPO
Less expensive than a public offering (no underwriting fees for unsold shares if existing shareholders subscribe)
Gives existing shareholders first right to maintain their ownership percentage
Often used when a company needs urgent capital but market conditions are unfavourable for a public offering
Warning: Rights issues can be dilutive if you don't participate
If you hold 1% of a company and choose not to subscribe to a rights issue, your ownership percentage falls below 1% as the company issues new shares. This dilution can significantly reduce your voting rights and proportional claim on future earnings. If you cannot afford to subscribe, the least you should do is sell your rights entitlement in the market to recover the embedded discount value. Never simply let rights lapse without action.
Side-by-Side Comparison
Parameter
Bonus Shares
Stock Split
Rights Issue
Nature
Free gift from reserves
Share subdivision
Paid offer at discount
Investor Action Needed?
No — automatic credit
No — automatic
Yes — must decide to subscribe, sell, or let lapse
Share Count
Increases (e.g., doubles in 1:1)
Increases (e.g., 5x in 1:5 split)
Increases (only if subscribed)
Share Price Impact
Falls proportionally
Falls proportionally
Falls slightly (dilution)
Face Value Change?
No change
Reduces proportionally
No change
Company Reserves Used?
Yes (free reserves/premium)
No
No (fresh capital raised)
Cash to Company?
No
No
Yes
Cash from Investor?
No
No
Yes (at discounted price)
Ownership % Change?
No change
No change
Diluted if you don't subscribe
Recent Indian Example
Bajaj Auto 1:1 bonus (2023)
HDFC AMC 1:2 split (2022)
Reliance Industries (2020)
Tax at Time of Issue
None (cost = NIL for bonus)
None
None at subscription stage
Tax Treatment of All Three in India
Bonus Shares Tax
No tax at time of issue. For capital gains tax when you sell: the cost of acquisition of bonus shares is considered NIL (zero) as per the Income Tax Act. Holding period begins from date of allotment of bonus shares. If held 12+ months, LTCG at 12.5% (above ₹1.25 lakh annual threshold); if held less than 12 months, STCG at 20%.
Stock Split Tax
No tax at time of split. For capital gains: the cost of original shares is redistributed across the increased share count. If you paid ₹10,000 for 10 shares (₹1,000 each) and it splits 1:5, your cost for the now-50 shares remains ₹10,000 (₹200 per share). Holding period is from the original purchase date. Capital gains tax rates are same as regular equity (LTCG/STCG as applicable).
Rights Issue Tax
The subscription price paid for rights shares is the cost of acquisition. Holding period begins from the date of allotment. If you sold your rights entitlement in the market, the sale proceeds are taxable as capital gains (with NIL cost, unless a specific cost allocation is possible under the rules). Consult a tax advisor for complex situations.
Learn More About How the Stock Market Works
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On the day of issue, bonus shares do not increase total wealth. If you had 100 shares at ₹1,000 each (total value ₹1,00,000) and receive a 1:1 bonus (100 extra shares), the price adjusts to approximately ₹500. You now have 200 shares × ₹500 = ₹1,00,000 — same total value. However, bonus shares can boost buying sentiment, improve stock liquidity, and signal management confidence in future earnings — which sometimes leads to genuine price appreciation over weeks or months beyond the mechanical adjustment.
If you choose not to apply for a rights issue, your existing shares get diluted — the company issues new shares to those who did subscribe, increasing total share count while your holding stays the same. Your percentage ownership of the company decreases. Additionally, in most Indian rights issues, the rights entitlement is listed and tradeable on the exchange for a few days — you should sell your rights entitlement to recover the embedded discount value rather than simply letting it lapse without any action. Letting rights lapse without selling is the worst possible outcome.
No. A stock split reduces the share price proportionally — a 1:5 split on a ₹1,000 stock gives you 5 shares at ₹200 each. The total value is mathematically identical. The company's earnings, assets, debt, and intrinsic value are completely unchanged. However, splits can genuinely improve trading liquidity and attract more retail investors who could not afford the pre-split price, sometimes leading to modest price appreciation due to improved demand from a broader investor base.
Bonus shares are not taxed at the time of allotment. However, for capital gains tax purposes, the cost of acquisition of bonus shares is NIL (zero) as per the Income Tax Act. When you eventually sell bonus shares held for more than 12 months, the full sale price is treated as long-term capital gain, taxed at 12.5% above the ₹1.25 lakh annual LTCG threshold. If sold within 12 months, the full price is short-term capital gain taxed at 20%. The original shares' cost basis and holding period remain unchanged.
A buyback (share repurchase) is when a company uses its cash reserves to buy back its own shares from the open market or via a tender offer, reducing the total shares outstanding. This increases earnings per share (since earnings are now divided among fewer shares) and theoretically increases share price. Unlike bonus shares (which increase share count and reduce price proportionally), buybacks reduce share count. Unlike rights issues, no money comes from investors. Buybacks are tax-efficient for some investors and are often seen as a signal that management believes the stock is undervalued.
A reverse stock split reduces the number of shares outstanding while proportionally increasing the share price. For example, in a 1:5 reverse split, every 5 shares you hold become 1 share, and the share price multiplies 5x. Companies typically do this to avoid delisting from exchanges that have minimum share price requirements, or to improve market perception (very low-priced shares, called "penny stocks", are associated with struggling companies). Reverse splits are quite rare in India and are generally viewed negatively by investors as they signal a struggling company rather than a thriving one.
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