Increases the number of outstanding shares and also the retail participation-
Bonus issue increases the total outstanding shares of a company. Suppose initially the total outstanding share is 10 lakhs. After the issue of 1:1 bonus, the number of shares increases up to 20 Lakhs. However, the total market value remains the same because the stock price corrects post the issue. For example- If previously any stock is trading at Rs-100, then post 1:1 bonus issue, the stock price will adjust to Rs-50. The price adjustment in the stock price occurs accordingly. However, in this whole process of price appreciation and correction, there is a hidden benefit. As soon as the company announces bonus share, investors rush to purchase the stock in a greed to get free extra shares. This appreciates the share price and also increases the liquidity of the stock. Further, after the company announces bonus shares, the price adjusts accordingly and correction occurs. Now, investors who were hesitant in investing at higher levels find the reduced price comfortable and invest in it. So, on a whole, issuing bonus share is a way the companies go for fund-raising.
Dip in ratios which are calculated considering the “per share” factor-
After the bonus share is granted and correction in price occurs, few ratios also change. However, no change in the profits, earnings etc happen. Change happens in the ratios which are calculated based on the “per share” parameter, like EPS. With an increase in total number of shares, there is a dip in these ratios. Like, EPS is the earnings per share divided by the total number of outstanding shares. So, as the number of shares will increase, the EPS will decrease.