Bonus shares on PSX: why the price drops, not value
How a PSX bonus issue works: the 20% example, why the price is divided by 1.2 on the ex-date, fractions, tax in principle and the cost-basis maths.
A bonus issue gives you extra shares at no cost, in a fixed ratio, and on the ex-date PSX divides the share’s reference price by that same ratio. A 20% bonus turns 100 shares into 120 and a Rs 120 share into a Rs 100 share. Before: 100 × Rs 120 = Rs 12,000. After: 120 × Rs 100 = Rs 12,000. No cash left the company and none arrived in your account; the same business is now cut into more pieces. What changes is your share count, your average cost per share and, in principle, a tax entry. What does not change is the rupee value of what you own on the day. This post walks through each of those, and the two places where investors get confused: the weeks before the new shares are credited, and the way a tracker records them.
What a bonus issue actually is (bonus share kya hai)
A company’s balance sheet has paid-up capital on one side and reserves, retained profits it never paid out, alongside it. A bonus issue moves an amount from reserves into paid-up capital and issues new shares to represent it. The accounting term is capitalisation of reserves. Nothing is bought, sold or paid; the company has restated part of its retained profits as share capital and handed the extra shares to the people who already own it, pro rata.
On PSX the ratio is announced as a percentage of your holding and coded (B) in the notice. “20% (B)” means 20 new shares for every 100 held, or one for five. “50% (B)” is one for two. “100% (B)” doubles your share count. This is a different percentage from a cash dividend, which is a percentage of face value, and the two often sit side by side in the same notice: “30% (i) (D) - 50% (B)” is a Rs 3 interim cash dividend plus a one-for-two bonus in one book closure.
Companies issue bonus shares for a range of reasons: to bring a high share price into a range that trades more easily, to signal that reserves are being permanently retained, or to reward holders without spending cash. None of those reasons puts money in your account.
The 20% example, step by step
Take an investor who bought 100 shares of an example company at Rs 90 each, a total cost of Rs 9,000. The company announces a 20% bonus. On the last trading day before the ex-date the share closes at Rs 120.
| Before ex-date | After ex-date | |
|---|---|---|
| Shares held | 100 | 120 |
| Reference price | Rs 120.00 | Rs 100.00 (120 ÷ 1.2) |
| Market value | Rs 12,000 | Rs 12,000 |
| Total cost | Rs 9,000 | Rs 9,000 |
| Average cost per share | Rs 90.00 | Rs 75.00 (9,000 ÷ 120) |
| Unrealised gain | Rs 3,000 | Rs 3,000 |
The adjusted reference price is the previous close divided by one plus the bonus ratio: Rs 120 ÷ 1.20 = Rs 100. Read down the columns and every total is identical. Only the per-share figures move, and they move together, so the gain is exactly what it was.
The general formula: adjusted price = previous close ÷ (1 + bonus percentage ÷ 100). For a 50% bonus divide by 1.5; for a 100% bonus divide by 2; for a 10% bonus divide by 1.1.
Why the price “drops” on the ex-date
It does not drop in the way a bad result makes a price drop. PSX sets the stock’s reference price for the ex-date at the adjusted level, so the day’s price limits and change percentage are measured from Rs 100, not Rs 120. Anyone looking at an unadjusted chart sees a cliff of about 17%; anyone looking at an adjusted series sees nothing at all. The fall is mechanical, it is known in advance, and it is exactly offset by the extra shares.
The same book-closure logic that governs cash dividends decides who gets the bonus. The register is read at the start of book closure; under T+1 settlement the ex-date is the last trading day before closure and the buy-by date is the day before that. Ex-date vs book closure vs record date goes through the calendar; the dividend calendar lists upcoming bonus issues with the same dates on each row.
The awkward weeks before the shares arrive
Here is where the panic usually happens. On the ex-date the price adjusts immediately, but the bonus shares are not credited to your CDC sub-account until the company completes the allotment after book closure ends. That takes a few weeks. In between, your account shows 100 shares at Rs 100: a value of Rs 10,000, which looks like a Rs 2,000 loss against yesterday’s Rs 12,000.
It is not a loss. The other Rs 2,000 is 20 shares in transit. When they land your account shows 120 shares at the market price and the total is restored. If you know the credit is coming, the dip in the interim is a timing artefact of a register that updates more slowly than an order book.
One practical consequence: if you sell during that gap, you are selling 100 shares at the adjusted price and you still receive the 20 bonus shares later, because entitlement was fixed at book closure. Nothing about the gap changes who is entitled.
Fractional shares
A 20% bonus on 105 shares is 21 shares exactly. On 103 shares it is 20.6, and companies do not issue six-tenths of a share. The notice states what happens to the fraction. The usual practice on PSX is to consolidate all fractional entitlements into whole shares, sell them, and either distribute the proceeds to the holders concerned in proportion to their fractions or pay the amount to a charitable cause named in the notice. Which of those applies is in the fine print of the specific announcement, and it is worth reading if you hold an odd lot.
The tracker arithmetic is simple either way: you receive the whole-number part of the entitlement, and any fraction is either a small cash line or nothing.
Tax on bonus shares, in principle
Bonus shares are not cash, but Pakistan’s tax law does not treat them as free. A withholding tax on bonus shares, which had been removed some years earlier, was reintroduced in 2023 through amendments to the Income Tax Ordinance 2001. The mechanism, in principle, is this: the value of the bonus shares is computed at a reference price around the start of book closure, tax is worked out on that value, and the company withholds bonus shares equal in value to the tax unless the shareholder pays the tax in cash within a window the company announces. If you do nothing, you receive slightly fewer than the full 20 shares, with the difference retained against the tax.
Two things are deliberately left blank here. The rate, and whether it differs for taxpayers on and off the Active Taxpayers List, changes with each Finance Act; the current figure is in FBR’s published withholding schedule and is usually restated in the company’s notice. And the treatment of bonus shares when you eventually sell, for capital gains purposes, is computed by NCCPL under its own published rules. Treat both as items to check, not to assume.
How Equivest’s tracker handles the cost basis
The most common way a bonus issue corrupts a portfolio is not in the tax but in the bookkeeping. If the 20 new shares are recorded as a fresh purchase at the market price, your total cost jumps from Rs 9,000 to Rs 11,000 and a real Rs 3,000 gain shrinks on screen to Rs 1,000. If they are recorded at a cost of zero as a separate lot, your average cost is right but the position is split in two for no reason.
Equivest’s portfolio tracker models a bonus as what it is: a change in share count with no change in total cost. When a bonus is announced on a symbol you hold, the corporate-actions banner on that stock shows a cost-basis preview computed against your actual position: new shares = shares × (1 + ratio); new average cost = total cost ÷ new shares. For the example above that is 120 shares at an average of Rs 75, total cost Rs 9,000, exactly as the table shows. That preview is the model the tracker uses for a bonus: more shares, the same total cost, so the credited shares are never mistaken for a purchase and the gain you actually have is the gain on screen.
If you bring your history in from a broker statement, the bonus credit line on that statement is a share credit, not a buy, and it should be read that way; importing a broker statement covers what the different rows mean.
The one-line summary: after a bonus you own more pieces of the same thing. Count the pieces, keep the cost, and let the price adjust.
Education, not investment advice.