Why do companies issue bonus shares

It has been noticed many a times that the market react positively to the announcement of bonus shares. Issue of the bonus shares involves transfer of funds from capital reserve account to share capital account on liabilities side of the balance sheet. These decisions by top management do not lead to change in the value of the company. Theoretically speaking, each shareholder gets a greater number of stocks, but the value of the share declines proportionately since the value of the company remains same. This contradiction which does happen in practice evokes one simple question – If issue of bonus shares lead to increase in the price of shares, why do only few companies issue bonus shares? In this study it is attempted to analyze reasons issuance of the bonus shares. Period of the study is January 2000 to September 2006 in which 165 companies had issued bonus shares. All the companies listed on National Stock Exchange and which had issued bonus shares within the concerned period have been included.