(a) What is the significance of the bonus share?
Bonus share is shares given by the company to its existing shareholders free of cost for them. It is a show of gratitude and a way of reward by the company to its shareholders.
(b) How can a company issue bonus share to the shareholders?
After every year performance, certain sum is kept as reserves after paying dividend and the current liabilities. This is statutory or even voluntary by the company for its future needs. A good total of reserves indicate good financial for a company. Together with share capital they form base for the book value of share. When the book value goes beyond a normal prudent level and the company does not envisage an immediate expansion or outlay of funds, the company decides to give bonus shares.
(b) How do the companies determine the ratio for issuing bonus shares?
Bonus shares are issued as a ratio like 5:1 or 20:1 etc on the existing number of shares. The base for this is calculated by deciding how much of the reserves can be taken for issuing bonus shares. Then that is correlated to existing number of shares. Or it can be other way also. Company wants to increase capital and does not want to go for a public issue. They decide to increase by giving bonus shares. So they decide about the increase in capital and that amount is taken from reserve.
(c) The most important question is: Why do the price of share goes down drastically
Whenever a company issue bonus shares (as happened in the case of ITC)?
As given in (b) the market keeps a watch on the reserves value of a company. The market price of a share is also dependent on this. So when a part of the reserve is used, the capital and reserves value comes down