It’s raining bonus shares on Dalal Street, with nearly two dozen companies offering free shares to their stakeholders in the past few weeks. Apart from leading companies like ITC, Edelweiss Capital and state-owned MMTC, the list includes many other relatively small- and medium-sized companies across sectors.
A sharp improvement in last year’s financials could have encouraged some of the companies to reward the shareholders, according to analysts.
The bonus announcements have already triggered a rally in some of the stocks. Several others may join the bonus bandwagon in the coming months as companies are confident that they will be able to service the expanded equity base.
Bonus shares are offered to existing shareholders free of cost by utilising the accumulated reserves of the company. Such a move results in a rise in equity capital, depending on the ratio in which shares are given. Analysts feel a company should offer bonus only if its reserves are healthy and they also have the capacity to generate enough profit to service the enhanced equity base in future.
“It is a healthy trend that many companies are issuing bonus shares. But, long-term investors should see that they are fundamentally strong before taking an investment call,” said Indiabulls Securities CEO Divyesh Shah.
A bonus issue improves liquidity in the stock and thereby lowers the impact cost, which is defined as the difference between the ideal price and the price at which the trade is actually executed.
Some investors may take the advantage of the bonus issue to bring down their tax liabilities, said a broker requesting anonymity. This can be done through ‘bonus stripping’ — the act of buying shares at cum-bonus price (unadjusted price) and subsequently selling the original holding at a loss once the stock becomes ex-bonus (price adjusted on the basis of the ratio). The loss can be adjusted against their capital gains on other holdings. Investors stand to gain significantly if they hold shares in a large quantities and have made huge capital gains, added the broker.
ITC, MMTC and Edelweiss Capital have doled out liberal bonus in the ratio of one for every share held by their shareholders. Analysts justified their moves on the ground that the companies have huge reserves on their balance sheets which amounted to Rs 13,628 crore, Rs 1,237 crore and Rs 1,271 crore, respectively as on March 31, ‘10. Their pre-bonus equity capital stood at Rs 382 crore, Rs 50 crore and Rs 37.5 crore respectively.
Zensar Technologies, NRB Bearings, Setco Automotive and Span Diagnostics are among the medium- and small-sized companies that have offered a 1:1 bonus. Their reserves stood at Rs 272 crore, Rs 178 crore, Rs 40 crore (as on FY09) and Rs 19 crore, respectively while their equity capital stood at Rs 21.6 crore, Rs 9.7 crore, Rs 8.8 crore and Rs 3.5 crore, respectively. These companies posted 17% to 32% growth in sales while their net profit rose between 39% and 473% during the year ended March 31, ‘10.
Shares of a few bonus-issuing companies have risen sharply, offering short-term traders an opportunity to make some quick gains. For instance, shares of Aegis Logistics, which announced a 2:3 bonus, rose 44% over the past one month. Span Diagnostics is another major gainer with an appreciation of 26% in the past one month.