Infosys, HCL Tech among firms looking to improve liquidity through bonus issues; investors gain on tax aspect
Companies are taking maximum advantage of the sustained market rally that is showing no signs of abatement.
Bonus share issuances by Indian firms rose more than 100% in the October-December quarter as stock prices went through stratosphere, shooting up even over 500% in some cases since April.
Thirteen companies announced bonus shares in December quarter of 2014 included biggies like Infosys and Godrej Industries.
The trend is strong in this quarter too, as January saw bonus issue announcements by five companies including HCL Technologies, Tech Mahindra and Persistent Systems.
Between April 1 2014 and December 31, 2015, the Sensex and the Nifty jumped 22.5% and 23.24%, respectively, with several sectoral indices notching higher gains.
Firms typically issue bonus shares to increase liquidity in the counter and attract retail investors, who may be wary of investing in stocks that trade at a very high price.
Bonus issues lead to reducing the share price, but increase the equity base, making it affordable for retail participants.
Also, such issues can provide tax benefits to the investors.
Suresh Surana, founder, RSM Astute Consulting Group, said the fall in existing market price post the bonus issue will be a notional loss if the shares are continued to be held.
Also, the provisions of 'bonus stripping' under Section 94(8) of the Income Tax Act 1961 come into play in case of sale of such shares.
The cost of the bonus shares is 'Nil' while the cost of the original shares remains the same – the actual cost of acquisition.
For instance, the Rs 1,000 share is split into two shares of Rs 500 each, a shareholder can sell one share of Rs 500 within nine months of the record date and set it off against gains in some other counter.
The remaining Rs 500 share will attract a capital gains tax if is sold after 12 months.
Ambareesh Baliga, independent market analyst, said, There are two set of companies which issue bonus shares, one which are fundamentally sound and the other whose stock price ran up in the bull run and who need to improve interest in their stock."
The companies which issue bonus shares need to have the visibility and confidence of serving the expanded equity base.
Fundamentals of a stock should be given more importance than the rise in price while picking a stock, said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Pvt Ltd.
With India Inc likely to see revival of the investment cycle, bonus issue would benefit those companies, which may want to hold on to liquid funds and may not want to go for dividends.
Also, in the case of dividend payout along with the cash outflow, there is an additional payment of 20% dividend distribution tax.
Baliga said IT, pharma and auto ancilliaries have performed well in the past and thus will be lead in issuing bonus shares going forward.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}