Pidilite bonus shares, first since 2010, explained: Why stock is showing a 50% fall today

Pidilite Industries, along with Time Technoplast, will turn ex-bonus in the ratio of 1:1. This means that for every Pidilite Industries share an investor holds, he will receive one additional share free of cost. This marks the first bonus issue by Pidilite Industries since March 2010 and the fourth in its history. All three earlier bonus issues by the company were also in the ratio of 1:1, data compiled from corporate database AceEquity shows.

On Monday, the stock closed at Rs 3,037.75 apiece on the BSE. However, when markets open today, the price will automatically adjust to reflect the bonus issue and would theoretically trade around Rs 1,519 apiece. On some trading apps, this may show up as a sudden 50 per cent drop, but investors have little reason to worry. The fall is merely optical, as their shareholding doubles with the issue of fresh shares. Importantly, there is no equity dilution.

The key attraction of bonus shares is that they come at no cost to shareholders. Pidilite Industries will utilise its free reserves and surplus to issue these additional shares, which will carry the same face value as the existing stock.

The impact of a bonus issue is straightforward: it increases the number of outstanding shares, reduces the company’s free reserves, and lowers earnings per share (EPS). Consequently, the stock price adjusts downward to factor in the new shareholding base.

While bonus issues and stock splits may look similar, their objectives differ. A bonus issue distributes accumulated earnings by rewarding shareholders with free additional shares while keeping the face value intact. A stock split, however, divides existing shares into smaller units to enhance liquidity, which reduces the face value. For example, in a 1:5 stock split, one share is split into five smaller shares, with dividend entitlement shrinking proportionately. In the case of a bonus issue, dividend entitlement remains unchanged.