What does a 1:5 bonus share issue mean?
The Sunday Nation
Nairobi,
24 March 2013
I find it interesting
that people like to a rather simple statement and change it into a
complex sounding phrase all in an attempt to simplify things farther.
Last week we saw a good example of this phenomenon where our
constitution says “more than half” but people call it “50% + 1”.
Away from politics, a
similar phenomenon occurs in business circles. This week, the Nation
Media Group (NMG) announced it’s 2012 financial results. As a result of
the good performance, the directors recommended that shareholders will
get bonus shares. The company’s announcement read as follows; “the
directors have also recommended…the issue…of one fully paid up ordinary
share for every five shares held…”
Now that is plain and
simple: If you have five shares, you will get one more to make a total
of six; and if you have 10, you will get another two bringing your
holding to 12; and so on.
But, when the
announcement was received by financial and business analysts and
commentators, it was changed dramatically. Some said that NGM will give
a “1:5” bonus and others called it “5:1”. Consequently, one confused
investor asked in an Internet forum: “When you say a 1:5 bonus,
does that mean that, if I have one
share I will get another 5; OR, that if I have 5, I will get another
one; OR, if I have one I will get another 4 to make 5; OR if I have 4 I
will get one more to make 5?”
A small change from
the original text made a simple matter very complicated and confusing.
So, I wish to appeal to all financial analysts not to confuse their
clients while attempting to sound technical and learned.
Mathematically, the
ratio 1:5 (read as “one-to-five”) means that every single item is
multiplied by a factor of five. Therefore, a 1:5 bonus share issue
becomes difficult to interpret. It can mean five extra shares for each
held, or each share is multiplied five times. The second interpretation
is, technically speaking, not a bonus; it is a “share split”.
The difference
between a bonus issue and a share split is that in the former, new
additional shares are given out while in the latter, the existing shares
are subdivided into smaller units. For that reason, the use of ratios
(the 1:5s and the like) must be reserved for share splits only and
should never be used to express bonuses.
Thus, one company may
announce a split in the ratio of, say, 1:5; meaning that each existing
share will be subdivided into five smaller units. Another one may
announce a 4-for-1 bonus, meaning that four new shares will be issued
for every one held. In both cases, an investor who had 10 shares
previously will now have 50; but while the face value for those of the
first company will change, those of the second will not.
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