REWARDING SHAREHOLDERS

Experts say bonus shares are being given to improve liquidity shares are being given to improve liquidity, besides rewarding the shareholders. After the issue, the stock price gets adjusted according to the bonus ratio. The total market value of the company, however, remains the same.

“One of the reasons for issuing a bonus is to reduce the value/price of the stock without impacting the financials. A bonus does not change anything financially in the company, but the stock price gets reduced. As regards the information technology stocks, a bonus or buyback is more of a company-specific approach rather than a trend across the sector,” explains Jayant Manglik, president (Retail Distribution) at Religare Securities.

A bonus share issue also indicates that the company is confident about the business’s capacity to generate value for a larger number of investors. That apart, it also helps in boosting the trading volume at the bourses, as more number of shares are traded.

In terms of rewarding the shareholders via a bonus issue instead of a higher dividend, companies also end up paying lesser dividend distribution tax.

“The retail investor’s interest is very high in the markets and a bonus makes shares more affordable for them given the sharp runup we have seen in stock prices over the past few months. A bonus issue is also a way of rewarding the existing shareholders. That apart, by giving a bonus, the investors also get a tax shield. Rewarding shareholders by paying higher dividend, on the other hand, would have been less beneficial given the recent policy on dividend distribution tax,” adds A K Prabhakar, head of research at IDBI Capital.

In the Union Budget for financial year 2016-17, the government had levied a 10 per cent charge on income by way of dividend in excess of ~10 lakh on individuals, Hindu Undivided Family (HUF) or partnership firms. In the 2017-18 Budget, the government had extended the rule to include private trusts.