Short answer

A bonus issue is the distribution of free shares by the company to the existing shareholders. A company may decide to distribute additional shares as an alternative to dividend payout. In a bonus issue, the number of shares increases, but the value of the investment remains the same.

Mr A holds 100 shares of a company at ₹10 each. If that company announces a 2:1 bonus, that is, for every one share, the shareholder will receive two shares for free, Mr A will receive 200 shares for the 100 shares held in the demat account, and Mr A’s total holdings will be 300 shares. However, the investment value will remain the same.

Value of investment before Bonus issue: 100 × ₹10 = ₹1000

Value of investment after Bonus issue: 300 × ₹3.33(300/1000) = ₹1000

Shares must be purchased before the ex-date to be eligible for a bonus. To learn more, see Why are the bonus shares not in my holdings even though the price of the stock has reduced? and What impact will a bonus issue have on my equity holdings and F&O positions?