A bonus 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. 

Similarities between  the two

As mentioned earlier, there are a number of similarities between a stock split and a bonus issue. Both serve to increase the total number of issued shares, making shares cheaper for investors to trade and consequently, boost trading liquidity. They both serve as signals of management' s confidence that the share price will rise over time. Both corporate actions also do not affect the fundamental value of the shares i.e. the value of shareholders' holdings should theoretically not change post either stock split or bonus issue. 

Key Difference

To understand the key difference between the two, we need to look at two separate jurisdictions, one in which the par value regime for shares still exists, e.g. Malaysia, and the other in which the par value regime has been abolished, e.g. Singapore. 

Malaysia

In Malaysia, under the par value regime, bonus shares are issued out of capital reserves such as accumulated profits and are issued at par value. As an illustration, we look at two identical companies A and B, which are both trading at the same share price of $10, and each with 1,000,000 outstanding shares and share capital plus accumulated profits totaling $10,000,000. In order to boost liquidity of their shares, Company A decides to undertake a bonus issue of 1 new share for every 1 existing share whilst Company B opts to do a 2-for-1 stock split. 

Let us further assume that each company has the same par value of $4 per share. For Company A, the issuance of 1,000,000 bonus shares will result in the transfer of $4,000,000 from its accumulated profits to share capital. For Company B, which chose to do a 2-for-1 stock split, there will be no change to its share capital. Instead, its par value will be reduced by half to $2 per share from $4 due to the split. The effects on both are presented below:

So why does this matter?

For shareholders, the impact from the resulting changes in the share capital and par value might not be immediately apparent. However, let us look at what happens if we extend our illustration above by assuming that a year after their respective corporate exercises, the market takes a downturn and both companies now trade at the same price of $3 per share instead of the original $5 (see figure 2). 

If the companies were to consider tapping on the equity capital markets at this time and raise funds from selling new shares, we can see that an immediate issue arises for Company A as its share price of $3 is now below its par value. As companies are not allowed to issue shares at below its par value, it has less flexibility in terms of fund raising options. Under Malaysian regulations, a company that desires to raise equity funds can still do so using what is known as a " Two Call rights issue" ,  where the existing shareholders pay a portion of the issue price, and the remainder will be capitalised from retained earnings and/or reserves. However, this requires an  additional approval from Securities Commission in Malaysia as well as requiring the company to have sufficient retained earnings and/or reserves to be capitalised, both of which could add complications to fund raising efforts. 

Company B, on the other hand, has no such problems as its share price of $3 is still above its par value of $2 per share. It can thus freely issue placement shares at a discount to its market price and proceed with a normal rights issue of shares as long as the issue price is above its par  value.

Singapore 

In Singapore[i], there is no practical difference between a stock split and a bonus issue as companies can choose to issue bonus shares without having to capitalise any of its capital reserves. In fact, this has been an increasingly popular trend as witnessed by recent issues such as Keong Hong Holdings Ltd and Ezra Holdings Ltd in May and October 2014 respectively:

Figure 3: Extracts from bonus issue announcements for SGX listed Keong Hong Holdings Ltd and Ezra Holdings Ltd 

As you can see above, neither issue capitalised any part of the companies' reserves to issue the bonus shares and this makes them in effect stock splits. Perhaps calling them bonus issues gives it a nicer ring. 

Conclusion

For a company in Singapore, there is no practical difference between a stock split and a bonus issue. Both corporate actions serve to increase the total number of outstanding shares and reduce prevailing share prices, making shares cheaper and more liquid for investors to trade in. Any perceived benefits are cosmetic in nature as neither corporate action alters the fundamentals of the shares.  

However, for a Malaysian company looking to raise liquidity in the trading of their shares, we would argue that a stock split may serve its purpose better than issuing bonus shares. This is because a bonus issue may narrow the difference between the market price and par value of its shares. While not a insurmountable problem, this could nevertheless introduce complications and limit its options in the event that it needs to subsequently tap onto the equity markets for future fund raising. 

Notes
[i]    Par value regime was abolished in Singapore in 2006