“Company X announces 1:5 stock split!” — You see this headline and check your demat account. Your 100 shares have become 500 shares. The price has dropped from ₹1,000 to ₹200. Are you richer? Poorer? Neither. But the market often reacts as if something fundamental has changed. This guide explains what actually happens during stock splits, bonus issues, and rights issues — and what it means for your portfolio and taxes.
Stock split: more shares, same value
What is a stock split?
A stock split increases the number of shares outstanding by dividing each existing share into multiple shares, while proportionally reducing the face value. The total value of your holding does not change.
Think of it like exchanging a ₹500 note for five ₹100 notes. You have more pieces of paper but the same amount of money.
The math
| Split ratio | Old face value | New face value | 100 shares become | Price adjustment |
|---|---|---|---|---|
| 1:2 (2-for-1) | ₹10 | ₹5 | 200 shares | Price halves |
| 1:5 (5-for-1) | ₹10 | ₹2 | 500 shares | Price drops to 1/5th |
| 1:10 (10-for-1) | ₹10 | ₹1 | 1,000 shares | Price drops to 1/10th |
Example: You hold 100 shares of Company X at ₹2,000 each (total value: ₹2,00,000). The company announces a 1:5 split. After the split, you hold 500 shares at ₹400 each. Total value: still ₹2,00,000. Your cost basis per share adjusts from ₹2,000 to ₹400.
Why companies split stocks
- Improve liquidity: Lower per-share price means more retail investors can afford to buy. A stock at ₹50,000/share (like MRF) locks out small investors. After a 1:10 split, it becomes ₹5,000/share — accessible to far more people.
- Increase trading volume: More shares at lower prices = more buy/sell orders = tighter bid-ask spreads = better price discovery.
- Signal confidence: Companies usually split when the stock price has risen significantly. A split is an implicit statement: “We expect the price to keep growing.”
- Options market accessibility: Lower price per share means lower lot value for F&O contracts, attracting more options traders.
Record date and ex-date
When a company announces a split, two dates matter:
- Record date: The date on which the company checks its register to determine who holds shares. You must own shares BEFORE the record date to receive the split shares.
- Ex-date: In India, the ex-date is typically the same as the record date (unlike dividends where ex-date is T-1). From the ex-date, the stock trades at the adjusted (post-split) price.
T+1 settlement impact: Since India moved to T+1 settlement, you must buy the stock at least 1 trading day before the record date to be recorded as a shareholder. Buying on the record date itself means settlement happens the next day — too late.
Recent Indian stock split examples
- IRFC (2024): Face value split from ₹10 to ₹5 (1:2 split). Stock was at ~₹190 pre-split. Post-split price adjusted to ~₹95. The stock subsequently rallied as retail participation increased.
- Tata Motors (2023): Demerger of commercial vehicles + passenger vehicles (not a traditional split, but similar effect on share count). Created two listed entities with separate valuations.
- IRCTC (2022): 1:5 split when stock was at ~₹4,400. Post-split price: ~₹880. Trading volumes jumped 3x in the month following the split.
Bonus shares: free shares from reserves
What are bonus shares?
A bonus issue is when a company gives existing shareholders additional shares for free, funded from the company's accumulated reserves (retained earnings or share premium account). Unlike a split, the face value does NOT change — but the price adjusts proportionally.
The math
| Bonus ratio | 100 shares become | Price adjustment | Face value |
|---|---|---|---|
| 1:1 (1 bonus for every 1 held) | 200 shares | Price halves | Unchanged |
| 1:2 (1 bonus for every 2 held) | 150 shares | Price drops to 2/3 | Unchanged |
| 2:1 (2 bonus for every 1 held) | 300 shares | Price drops to 1/3 | Unchanged |
| 3:1 (3 bonus for every 1 held) | 400 shares | Price drops to 1/4 | Unchanged |
Example: Infosys announces a 1:1 bonus. You hold 100 shares at ₹1,800 each (value: ₹1,80,000). After bonus, you hold 200 shares at ₹900 each. Value: still ₹1,80,000. But Infosys has converted ₹1,800 crore from reserves to share capital on its balance sheet.
Why companies issue bonus shares
- Reward shareholders: Psychologically, receiving “free shares” feels like a reward, even though total value is unchanged. It signals that the company has strong reserves.
- Capitalise reserves: Moves money from reserves (free reserves/share premium) to share capital. This is an accounting reclassification, not a cash transaction.
- Improve liquidity: Same as splits — more shares at lower prices increase trading activity.
- Demonstrate profitability: Only companies with sufficient accumulated profits can issue bonus shares. It's an indirect signal of financial health.
Dilution: does bonus issue dilute your ownership?
No. Every shareholder gets bonus shares in proportion to their existing holding. If you owned 1% of the company before the bonus, you own 1% after. Your ownership percentage is unchanged. The total number of shares outstanding increases, but your proportionate claim on earnings and assets is identical.
This is fundamentally different from a fresh equity issuance (like an IPO or FPO), where new investors come in and dilute existing shareholders.
Recent Indian bonus issue examples
- Infosys (2018, 2022): 1:1 bonus in 2018 (record price adjustment). Infosys has issued bonuses multiple times in its history — a tradition for IT companies with large reserves.
- Wipro (2019): 1:3 bonus issue when stock was at ~₹300. Post-bonus price: ~₹225. Wipro has been the most frequent bonus issuer among large-caps.
- Tata Steel (2022): 1:10 bonus issue (1 share for every 10 held). Smaller ratio but significant given the capital-intensive nature of the business.
Stock split vs bonus issue vs rights issue
| Parameter | Stock split | Bonus issue | Rights issue |
|---|---|---|---|
| What changes | Face value reduces, shares multiply | More shares issued from reserves, face value unchanged | New shares offered at a discount, investor pays money |
| Cost to investor | ₹0 | ₹0 | You pay the rights issue price per share |
| Company receives cash | No | No | Yes (that's the point — to raise capital) |
| Balance sheet impact | None (only face value changes) | Reserves decrease, share capital increases | Cash increases, share capital increases |
| Ownership dilution | No | No | No (if you subscribe). Yes (if you don't). |
| What if you ignore it | Automatic — shares split in your demat | Automatic — bonus shares credited to demat | Your ownership gets diluted. You can sell the rights entitlement on the exchange. |
Rights issue: the one that costs money
Unlike splits and bonuses, a rights issue requires you to pay for additional shares — typically at a 20-40% discount to market price. The company is raising fresh capital from existing shareholders.
Key rule: If you don't want to subscribe to the rights issue, sell your Rights Entitlement (RE) on the exchange before the deadline. REs trade like regular shares for a limited period. If you ignore the rights issue entirely, your ownership gets diluted AND you lose the value of the RE.
Recent example: Reliance Industries rights issue (2020) — 1:15 at ₹1,257/share when market price was ~₹1,600. Investors who subscribed locked in a 21% discount. Those who ignored it lost ~₹23 per existing share in dilution value.
Tax implications of corporate actions
Stock split tax treatment
- At the time of split: No tax event. You don't owe any tax when your shares split.
- Cost basis adjustment: Your original purchase cost is divided across the new number of shares. Bought 100 shares at ₹1,000 each? After 1:5 split, your cost basis is ₹200 per share for all 500 shares.
- Holding period: Continuous from original purchase date. A split does not reset your holding period. If you bought pre-split shares 13 months ago, post-split shares qualify for LTCG.
- When you sell: Normal STCG (20%) or LTCG (12.5% above ₹1.25L) rules apply based on holding period from original purchase.
Bonus share tax treatment
- At the time of bonus: No tax event. Receiving bonus shares is not taxable income.
- Cost basis of bonus shares: ₹0 (zero). This is critical. Bonus shares have zero acquisition cost for tax purposes.
- Holding period of bonus shares: Starts from the allotment date (not from original share purchase date). This is the key difference from splits.
- When you sell bonus shares: Since cost = ₹0, the entire sale price is your capital gain. If sold within 12 months of allotment = STCG at 20%. After 12 months = LTCG at 12.5% above ₹1.25L exemption.
- Cost basis of original shares: Remains unchanged. Your original shares keep their original purchase cost.
Tax trap example: You bought 100 shares at ₹500 in 2022. Company issues 1:1 bonus in May 2026. You now have 200 shares. If you sell all 200 shares at ₹300 in August 2026:
- Original 100 shares: Cost ₹500, sale ₹300 = LTCG loss of ₹200/share (held > 12 months).
- Bonus 100 shares: Cost ₹0, sale ₹300 = STCG gain of ₹300/share (held < 12 months from allotment, taxed at 20%).
- Net economic loss per share: ₹200. But tax: you owe 20% on ₹300 STCG on bonus shares, and the LTCG loss can only offset LTCG gains (not STCG). You pay tax despite losing money overall.
Rights issue tax treatment
- If you subscribe: Cost basis = rights issue price paid. Holding period starts from allotment date.
- If you sell the RE (Rights Entitlement): Sale proceeds minus ₹0 cost = short-term capital gain (REs are always short-term since they exist for a few weeks). Taxed at 20%.
- If you let RE lapse: No tax event, but you lose the economic value of the entitlement.
What to do when your company announces a corporate action
- Read the announcement on BSE/NSE. Check the exact ratio, record date, and purpose (especially for rights issues).
- For splits and bonuses: No action needed. Shares will automatically adjust in your demat. Verify the credit after record date + 2-3 business days.
- For rights issues: Calculate whether subscribing makes sense. Compare rights price to current market price. If you don't want to subscribe, SELL the RE on the exchange before it expires.
- Update your cost basis records. Your broker should adjust cost in the holdings tab, but verify manually. Tax computation requires accurate cost basis.
- Don't trade based on split/bonus announcements alone. The price adjusts proportionally. There's no guaranteed arbitrage. The stock may rally post-announcement (sentiment-driven) or may not.
The psychological trap
Retail investors often treat splits and bonuses as “good news” and rush to buy. Studies show a short-term positive price reaction around announcement dates (2-5% abnormal returns in the Indian market). But this is largely driven by retail sentiment, not fundamental change.
A ₹200 stock post-split is not “cheaper” than the ₹1,000 stock pre-split. The company's earnings, cash flows, and competitive position are identical. If you wouldn't buy at ₹1,000 pre-split on fundamentals, you shouldn't buy at ₹200 post-split either.
The correct response to a split/bonus announcement: note it, update your records, and continue your investment thesis evaluation as if nothing happened. Because economically, nothing did.
Use the capital gains calculator to model the tax impact of selling split or bonus shares, and check the capital gains tax guide for the full FY26 framework.