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Tech Mahindra's 1:1 bonus: what a bonus issue is, and why free shares do not make you richer overnight
Tech Mahindra's board has recommended one free share for every share held, its first bonus issue since 2015. Here is how a bonus works, what happens to the share price, and what shareholders need to watch for.
The short answer
A bonus issue gives existing shareholders extra shares free of charge, in proportion to what they already hold. In Tech Mahindra's 1:1 bonus, a holder of 100 shares will end up with 200. The company turns part of its reserves into share capital and raises no new money, so the share price adjusts downwards, roughly halving in a 1:1 issue, and the value of each holding stays about the same on the day.
What is a bonus issue?
It is a free distribution of extra shares to a company’s existing shareholders, in proportion to what they already own.
Tech Mahindra’s board recommended on Thursday a bonus “in the ratio of 1:1”. That means one new share for every share held. Someone with 100 shares will have 200; someone with 7 will have 14. Each new share has the same face value as the old ones, ₹5 in Tech Mahindra’s case.
Where do the free shares come from?
From the company’s own reserves, not from new money.
Over the years a profitable company builds up reserves on its balance sheet. In a bonus issue, it moves part of those reserves into its share capital and issues shares to match. No cash comes in and none goes out. Tech Mahindra is raising its authorised share capital, the ceiling on how many shares it can issue, from ₹924.3 crore to ₹1,000 crore to make room for the new shares.
Does it make shareholders richer?
Not on the day it happens.
The company is worth the same after the bonus as before it, and each shareholder owns the same slice of it. What changes is the number of slices. So the share price adjusts. In a 1:1 bonus it roughly halves.
Take a shareholder with 100 Tech Mahindra shares at Thursday’s closing price of ₹1,650 on the NSE. That holding is worth ₹1,65,000. After the bonus, the same person would hold 200 shares, and if nothing else moved, each would trade at about ₹825. The holding would still be worth about ₹1,65,000. Any gain or loss after that depends on how the business, and the market, perform.
Bonus issue, stock split and dividend compared
Then why do companies do it?
To make the shares cheaper to buy and to signal confidence.
A lower price per share puts the stock within reach of more small investors and can make it trade more often. Turning reserves into capital also tells the market that the company expects to keep earning enough to support a larger share base. Tech Mahindra’s bonus comes with a strong quarter: net profit rose 32.7% to ₹1,586 crore and new deals topped $1 billion for the fourth quarter running. Mohit Joshi, its managing director and chief executive, said the deal wins “reflect the strength of our customer relationships”.
Investors often cheer a bonus announcement, but the extra shares on their own add nothing to what the company earns.
How long will it take?
About two months at most, if shareholders agree.
A bonus that needs shareholders’ approval, as Tech Mahindra’s does, must be carried out within two months of the board meeting that announced it, under rules of the Securities and Exchange Board of India (SEBI). Once the company fixes a record date, a faster timeline applies since October 2024: the shares are deemed allotted the next working day and can be traded the working day after that. Shareholders on the company’s register on the record date get the bonus. Tech Mahindra has not yet announced that date.
What about the dividend?
It comes first, on the old number of shares.
The board also declared an interim dividend of ₹15 a share, with a record date of Friday, 23 October. Because the bonus still needs approval and has no record date yet, the dividend will be paid on shareholdings as they stand before the bonus. Investors need to hold the stock by 22 October to qualify, and the dividend is due to be paid by 13 November.
What should shareholders watch for?
The record date, and the price adjustment when it comes. On the day the shares start trading without the bonus entitlement, the quoted price will drop sharply. That is the arithmetic of the bonus, not a crash. Charts and apps that do not adjust for the bonus can make it look like one.