Nykaa issued Bonus Shares in the ratio of 5:1 to its existing shareholders as on 14th November 2022. Nykaa has announced that the Bonus shares were issued to protect the worth of retail investors.
Is it? To understand, we need to get the story of Nykaa and its IPO.
The Nykaa’s Story
Nykaa was the only profitable unicorn start-up before it got listed in 2021. Before listing on 10th November 2021, Nykaa had issued shares to pre-IPO investors namely Narotam S Sekhsaria, Mala Gopal Gaonkar, and Lighthouse India Fund. As per SEBI regulations, pre-IPO investors cannot sell their shares within the lock-in period of 1 year from the date of listing i.e., 10th November 2022.
After getting listed, the profit of Nykaa fell by 96% in the last financial year. The retail investors started selling their shares and the share price of Nykaa started falling. The pre-IPO investors were also eagerly waiting for the end of the lock-in period so that they can sell the shares in order to protect their worth. Soon Nykaa’s Management came up with a master plan to avoid the pre-IPO investors from selling their stake by issuing Bonus Shares on 2nd November 2022.
Cap of Capital Gain
Nykaa had issued Bonus shares in the ratio of 5:1 i.e., the shareholder having 1 share had, now, 6 shares in the company out of which 1 share was a long-term capital asset (LTCA) while the other 5 shares were short-term capital asset (STCA) as in November 2022.
Let’s understand it with an example:
The price of each share of Nykaa as on 11th November 2022 was Rs. 207.
Net Consideration of LTCA = 207
Less: Cost of LTCA (as on IPO) = 1125
Long Term Capital Loss (LTCL) = 1125 – 207 = 918
Net Consideration of STCA = 207*5 = 1035
Less: Cost of STCA (Bonus Shares) = NIL
Short Term Capital Gain (STCG) = 1035
As LTCL cannot be set off against STCG under Income-tax Law, the whole of the STCG would have taxable @ 15% amounting to Rs. 155.25.
Therefore, the pre-IPO investors of Nykaa should, in order to avoid the additional tax burden, not sell its shares till these Bonus Shares had converted to LTCA.
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