Nov 2016 Q2 c.

A stock split simply divides existing outstanding shares held by shareholders into multiple shares. i.e. if you own one share before a 2-for-1 split, you will own 2 shares after. A scrip issue works in almost the same way except that instead of having your shares split into 2, the company issues you one additional fully paid share free of charge so that you will also own 2 shares after the bonus issue.

One of the major reasons why companies declare bonus issues is that a higher number of shares improves float and liquidity and thereby traded volumes of the stock. A lower price also makes the stock seem more affordable to small retail investors, who might otherwise give it a miss at high price levels. Another aspect of a bonus issue is that it reflects the confidence of the company in its ability to service a larger equity base. Thus, bonus issues are said to be a good signaling mechanism on the company’s capacity to deliver future benefits to shareholders in terms of increased dividend.