Let's break down the difference between a stock split and bonus shares. While both increase the number of shares an investor holds, they do so through different mechanisms and have distinct implications.
Here's a table summarizing the key differences:
Feature | Stock Split | Bonus Shares (Bonus Issue/Scrip Dividend) |
What it is | Dividing existing shares into more shares. | Issuing new shares to existing shareholders, typically from a company's reserves. |
Source | Rearrangement of existing shares. | Company's accumulated profits or reserves (e.g., share premium account, retained earnings), as per Pakistani corporate regulations. |
Share Capital | Total share capital remains the same. | Increases the total paid-up share capital of the company in its balance sheet. |
Par Value | Par value (face value) per share decreases proportionally. | Par value per share remains the same. |
Example | 2-for-1 split: If you own 100 shares of a Pakistani company trading at PKR 100, after a 2-for-1 split, you'll have 200 shares at approximately PKR 50 each. | 1:1 bonus: If you own 100 shares of a Pakistani company, and a 1:1 bonus is declared, you'll receive 100 additional shares, totaling 200. While the par value per share remains the same, the market price usually adjusts down. |
Cash Outflow | No cash outflow from the company. | No cash outflow from the company to shareholders, but it capitalizes reserves on the balance sheet. |
Investor Impact | Total value of holding remains the same immediately after the split (more shares, lower price per share). | Total value of holding remains the same immediately, but the number of shares increases. |
Purpose | Make shares more affordable/accessible to a wider range of investors, increase liquidity, reduce trading "sticker shock" on the PSX. | Distribute accumulated profits without paying cash dividends, retain cash for reinvestment, reward shareholders, improve liquidity in the Pakistani market. |
Accounting | Only affects the number of shares and par value; no change to total equity. | Reduces reserves and increases paid-up capital within the equity section of the balance sheet, as per Pakistani accounting standards. |
In simpler terms:
Stock Split: Imagine you have a whole pizza (representing a Pakistani company's market capitalization). A stock split is like cutting that same pizza into more, smaller slices. You still have the same amount of pizza, just more pieces. Each slice is cheaper, but your total value is the same. The company's total capital doesn't change; it's just divided differently.
Bonus Shares: Imagine the pizza company has some extra ingredients in the back (accumulated profits or reserves). They decide to use those ingredients to make another small pizza for existing customers for free. So, you get more pizza (more shares) from their existing resources. The company's capital actually increases on paper because it's converting its internal profits into external share capital, which is a common practice for companies listed on the PSX.
Why companies in Pakistan (and elsewhere) do them:
Stock Split: Often done when a stock's price gets very high on the Pakistan Stock Exchange, potentially making it less attractive to smaller individual investors. By lowering the per-share price, it becomes more accessible and can increase trading volume (liquidity).
Bonus Shares: Pakistani companies might issue bonus shares to reward shareholders when they have strong reserves but prefer to retain cash for future investments or growth. It's a way to capitalize on accumulated earnings without affecting cash flow. It also effectively reduces the earnings per share, which can make the stock appear more attractive on valuation metrics, and is a common dividend policy in Pakistan.