Splits, bonuses and buybacks

Three corporate actions, reported in the same excited tone, doing completely different things. Two of them do nothing at all.

A stock split

A ₹1,000 share becomes ten ₹100 shares. If you held 50, you now hold 500.

Your ownership fraction: unchanged. The value of your holding: unchanged. The company: unchanged. Nothing has happened except that the units got smaller.

The stated reason is usually accessibility — a lower price per share is easier to buy in small quantities. That is a real if modest effect, and it is the whole of it.

A split does not make a company cheaper. Ten slices of a cake is not more cake.

A bonus issue

You receive additional shares free, in proportion to what you hold. A 1:1 bonus doubles your share count.

Also nothing. The company has issued more shares to the same owners in the same proportions, so each share represents half as much of the company as before, and the price adjusts accordingly.

	Before	After 1:1 bonus
Shares you hold	100	200
Price per share	₹500	₹250
Value of your holding	₹50,000	₹50,000
Your share of the company	unchanged	unchanged

The word "free" does a lot of work in the reporting. You received twice as many claims on the same business.

Why do companies do it? Liquidity, signalling confidence, keeping the price in a range that feels approachable. All second-order, none of it value creation.

Why the market sometimes rises anyway

If a split and a bonus change nothing, why does the share often rise on the announcement?

Two honest explanations. Signalling: a board announcing a bonus is usually a board that is confident, and the market reads the confidence rather than the arithmetic. Behaviour: a lot of buyers react to the announcement itself, and their buying moves the price regardless of the logic.

Neither means value was created by the action. A price that rises on a cosmetic change is telling you about the buyers, not about the business.

A buyback

This one is real.

The company uses its own cash to buy its shares from the market and extinguish them. There are then fewer shares outstanding — so every remaining share represents a larger fraction of the company.

Two consequences follow:

Your ownership rises without you doing anything. If 10% of shares are bought back and you did not sell, your stake is now about 11% larger relative to the company.

Earnings per share rise mechanically. The same profit divided among fewer shares.

That second one is why buybacks deserve scrutiny rather than applause. EPS rising because the share count fell is not the same as the business earning more, and a management paid on EPS targets has an obvious motive.

The real question for a buyback is the same one as for a dividend, and the same one as for any use of cash: was this the best available use of the money? Buying back shares at a high price destroys value for the shareholders who stay, exactly as buying at a low price creates it.

The test

For any corporate action, ask one question: does my fraction of the business change, and does the business have more or less cash?

Action	Your fraction	Company's cash
Split	Unchanged	Unchanged
Bonus	Unchanged	Unchanged
Dividend	Unchanged	Lower
Buyback (you don't sell)	Higher	Lower
Rights issue (you don't take it up)	Lower	Higher

That last row is the subject of chapter 5, and it is the one that can cost you something while you are not paying attention.

The point

Splits and bonuses rearrange the units and change nothing. Dividends convert value into cash. Buybacks genuinely increase your stake and spend real money doing it — so whether they were a good idea depends entirely on the price paid.