Bonus Share
A bonus share is an additional free share issued by a company to its existing shareholders in proportion to their current holdings, financed by converting retained earnings into paid-up capital.
Detailed Explanation
In contrast to cash dividends that drain liquid cash from the company's bank reserves, a bonus share keeps the capital retained inside the business while increasing the total number of issued shares. The company shifts funds from its "Retained Earnings / Reserve Fund" to its "Paid-Up Capital" line on the balance sheet. While the investor receives more physical share units in their Demat account, their proportional ownership percentage of the overall company remains mathematically identical. NEPSE adjusts the market price downward on the book closure date to reflect the expanded share supply.
Why It Matters to You
Bonus shares allow growing companies to reward loyal shareholders without depleting precious liquid capital needed for infrastructure projects or business expansion. For long-term investors, accumulating bonus shares over decades compounds total share counts exponentially, magnifying future cash dividend streams.
Formula & Calculation
Adjusted Price = Market Price before Book Closure / (1 + Bonus Fraction)
Divide the last traded market price before book closure by 1 plus the bonus share percentage expressed as a decimal.
- Market Price = Closing share price before book closure date
- Bonus Fraction = Bonus % divided by 100 (e.g. 20% = 0.20)
A stock closes at NPR 600 before book closure with a 20% bonus share declared.
Adjusted Price = 600 / (1 + 0.20) = 600 / 1.20 = NPR 500.
Where It Is Commonly Used
- Commercial bank capital expansion mandates directed by Nepal Rastra Bank
- Hydropower companies reinvesting cash earnings into second-stage hydro projects
- NEPSE portfolio valuation updates post-book closure
- Long-term compounding dividend portfolios
Key Advantages & Limitations
Key Advantages
- Conserves liquid cash inside the company for productive capital expansion
- Increases your total share units without requiring fresh capital injection
- Lowers market price per share, improving trading liquidity on NEPSE
- Compounds long-term dividend streams as future payouts apply to higher share counts
Limitations & Risks
- Does not generate immediate liquid cash in your bank account
- Dilutes Earnings Per Share (EPS) and Return on Equity (ROE) if profits stagnate
- Investor must pay the 5% dividend tax unless covered by a cash dividend fraction
- Takes several weeks to months to be credited and tradeable in Demat accounts
Common Misconceptions & Beginner Traps
A 50% bonus share means the company just made you 50% richer.
NEPSE automatically reduces the stock price by 33.3% on book closure day. The total market value of your holding remains identical immediately after adjustment.
Bonus shares are completely tax-free in Nepal.
Bonus shares are taxable at 5% of their par value (NPR 100). Companies usually propose a small cash dividend (e.g. 0.526%) specifically to cover this tax liability.
Bonus Share vs Rights Share
Free capitalization of retained earnings vs paid subscription of fresh equity
| Factor | Bonus Share | Rights Share |
|---|---|---|
| Cost to Investor | 100% Free (capitalized from company reserves) | Must pay NPR 100 per share from personal bank |
| Sign of Company Health | Indicates strong accumulated past profits and reserves | Company needs fresh cash; may indicate capital deficiency |
| Obligation to Apply | Automatic deposit into Demat; no action required | Must actively apply via MeroShare or rights lapse |
The NPR 8 Billion Capital Directive and NEPSE's Cultural Love for Bonus Shares
In 2015, Nepal Rastra Bank mandated a fourfold increase in commercial bank paid-up capital-from NPR 2 billion to NPR 8 billion. To meet this target without collecting fresh cash, banks issued massive bonus shares year after year. Nepali investors historically celebrated bonus shares as "free money," mistakenly believing their total net worth doubled. In reality, while share quantity increased, company earnings were divided across a much larger share base, causing earnings per share (EPS) to plunge and market prices to adjust downwards. Understanding price adjustment is critical to evaluating bonus shares objectively.
- NEPSE automatically adjusts the market price downwards on book closure day.
- Your overall wealth on day one does not change: more shares * lower price = original value.
- Bonus shares dilute EPS unless the company grows profits at the same percentage.
- Bonus share distributions require payment of 5% dividend tax on the face value.
Real-World Practical Scenario
Aashish owns 100 shares of a bank trading at NPR 400 per share (Total investment = NPR 40,000). The bank declares a 25% bonus share. On book closure morning, NEPSE adjusts the market price: Adjusted Price = 400 / (1 + 0.25) = NPR 320. Aashish now owns 125 shares worth NPR 320 each, totaling exactly NPR 40,000. He did not become richer overnight. However, if the bank grows its business over the next 3 years and the market price climbs back from NPR 320 to NPR 400, his portfolio will be worth NPR 50,000-a gain driven by business growth, not the mechanical bonus split.
A bonus share increases share units but does not create immediate wealth on day one; wealth creation only happens when the underlying company grows its future profits.
Key Takeaways & Summary
- Bonus shares are free shares issued by capitalizing retained earnings into paid-up capital.
- NEPSE adjusts the market price downward on book closure morning, keeping day-one net worth unchanged.
- Bonus shares conserve cash for business expansion while increasing the investor's unit count.
- Wealth creation from bonus shares occurs over multi-year horizons as company earnings expand.
Where You’ve Seen This Term
This concept is actively referenced across the following RisePaisa lessons, guides, and interactive tools: