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Tipsforinvestinginbonusissuesonstockmarkets

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Home Money Today Investment December 2011 Story

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Rahul Oberoi/Money TodayDelhi Print Edition: December 2011

Abonusisalwayswelcome.So,itseems,isabonusshareissue.Givingbonus
sharesisoneofthewayscompaniesrewardinvestorswithoutdisturbingtheircash
balances.SanjivBajaj,MD,BajajCapital,says,"Onewayofrewardingshareholders
istogivedividend.Anotherisbygivingbonussharesandcapitalisingreserves."
Doesabonusissuebenefitsinvestors?DataanalysedbyMoneyTodayovera10
yearperiodshowsthatinmostcases,thestockpriceofacompanyrisesaftera
bonusissue.Ouranalysisissplitintotwopartsfirst,themovementinshareprice
fromthetimetheissueisannouncedtilltherecorddate,andsecond,oneyearafter
therecorddate.
Ofthetop30companieswhichannouncedbonusissuesbetweenJanuary2001and
July2010thesharepriceof21companiesrosetilltherecorddate.Also,stocksof
24companiesroseintheyearaftertherecorddate.

LATEST MUSTREAD TECHNEWS

WhatYouGet
Bonussharesaresharesgiventoexistingstockholdersinproportiontothenumber
ofsharestheyhold.A1:1bonusmeansthatashareholderwillgetoneshareforeach
shareheldbyhim.Forexample,ifsomeoneisholding10shares,hewillget10
more.Theshareholdersdonotpayanythingfortheseshares.

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MUSTREAD:Howtogethigherreturnsfromstocktrading
Togivebonussharestoinvestors,acompanybuildsareservebyretainingapartof
itsprofitovertheyears(thepartthatisnotpaidasdividend).Whenthesefree
reservesincrease,thecompanytransfersapartofthemoneyintothecapital
account,fromwhichitissuesbonusshares.Onlyfullypaidupsharesareeligible
forbonus.
"Thepurposeofissuingbonussharesistoincreaseliquidityinthestockandhand
outtheavailabledistributablenetworthinacashneutralmanner,"saysSudip
Bandyopadhyay,managingdirectorandchiefexecutiveofficer,Destimoney
Securities.

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PriceAdjustment
Usually,afterthebonusissue,thesharepriceofthecompanygetsadjusted
accordingtothebonusratio.Forexample,ifthepricebeforebonusisRs200anda
companyissuesbonussharesintheratioof1:1,thepostbonussharepricewillbe
Rs100,whichmeansthatthetotalmarketvalue(2xRs100=Rs200)remainsthe
same.
ImpactonPrice
Ouranalysisalsoshowsthatthereishighchanceastockwillriseaftertherecord
date.However,expertshavemixedviewsonthis.
Duringtheoneyearperiodfromtherecorddate,theadjustedstockpricesof
Mahindra&Mahindra,TCS,L&T,RanbaxyandHDFCsurged82percenttoRs
329,79percenttoRs775,71percenttoRs1,654,71percenttoRs480and65per
centtoRs124,respectively.
MUSTREAD:Whattodowhenastockdelists
MehulAshar,presidenthead,wealthmanagement,InventureGrowthand
Securities,says,"Abonusissueisgenerallyperceivedtobepositivebyinvestors
andcreatesmoredemandforthestock.Ifinthefollowingyear,thecompany
increasesitsearningandmaintainstheearningpershare(EPS)atlevelsestimated
bythemanagement,thestockwillgivegoodreturns."Afterthebonusissue,the
numberofsharesoutstanding(aspertheratio)increases,andtheEPSfallsbythe
sameextent.

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PrakashDiwan,headinstitutionalclients
group,AsitCMehtaInvestment,says,
"Mostly,healthycompaniesgoforbonus
issues.Thereishighchanceofthestock
pricerisinginthecoupleofquartersafter
therecorddate."

Joining the Party: How shares reacted to

bonus issue announcements

Likestocksplit,themostcommonreason
forissuingbonussharesisthattheshare
pricehasbecomehighandisaffecting
demand.

KaushikDani,headequity,PeerlessMF,
ClickheretoEnlarge
says,"Acompanyissuesbonusshareswhen
ithasbrightprospectsandthusdoesnot
minddilutingcapital.Itincreasesliquidityandretailparticipation."
However,ontheflipside,companieslikeSiemens,HCLTechnologiesandSterlite
Industrieswitnessedsellingpressureaftertheannouncementofbonusissues.From
thedateofannouncementtilltherecorddate,theirsharepricesdeclined21per
cent,4percentand13percent,respectively.Duringoneyearaftertherecorddate,
theyfell72percent,19percentand16percent,respectively.
AlexMathews,researchhead,GeojitBNPParibasFinancialServices,says,"The
announcementofbonusshareshasnoaffectonshareprice.Afterthe
announcement,thestockcanmoveineitherdirectiondependingonthemarket
sentiment."
PankajPandey,headofresearchatICICIDirect,agrees."Marketsentimentsgive
directiontostocks.However,bonusshareshelpincreaseliquidityinthestock,"he
says.

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Recently,AshokLeyland,TitanIndustriesandBhuwalkaSteelIndustriesoffered
bonussharestoinvestors,resultinginariseinprices.ThesharepricesofAshok
Leyland,TitanIndustriesandBhuwalkaSteeljumpedaround2percent,9percent
and10percent,respectively,fromthedateofannouncementtilltherecorddate.

39:Numberofcompanieswhichannouncedbonusissuesbetween
JanuaryandOctober2011
http://www.businesstoday.in/moneytoday/investment/tipsinvestincompanybonusissuesstockmarkets/story/20327.html

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departments are often given
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E Kumar Sharma

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THINGSYOUNEEDTOKNOW
1.ExBonus:Itmeansaftertherecorddate.Itisthedateonwhichtheshareprice
isadjustedonstockexchangesaccordingtothebonusratio

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2.RecordDate:Thecutoffdatefixedbyacompanytodeterminewhoiseligible
togetbonusshares.Yougetthebenefitonlyifyouhavesharesinyourdemat
accountonthisdate

Sarika Malhotra

ShouldYouBuy?
Ifyouwanttobuysharesofcompanieswhicharegoingtoannouncebonusissues,
holdon.Oneshouldnotbuypurelyonthebasisofexpectedbonussharesunless
oneiscertainaboutthefundamentalsofthecompany.

MORE

RajeshJain,executivevicepresidentandheadofretailresearch,Religare
Securities,says,"Abonusissueisasignthecompanyisexpandingequityand
increasingliquidity,butitisnottheonlyindicatorofperformance.Investorsshould
takeadecisionafteranalysingthefundamentalsofthecompany."
KaushikDaniofPeerlessMFagreesandsays,"Bonussharesleadtoadjustmentin
thesharepriceaccordingtotheproportionofdilution.So,thepricecomesdownin
theimmediateterm.However,inthelongrun,thesharepricedependsonthe
fundamentalsandgrowthprospectsofthecompany."
Itwouldbeanaddedbonusifyoustudythecompanyanditsprospectsbefore
takingacalloninvestinginonethathasannouncedorisconsideringissueofbonus
sharesorwalkacrosstoanadvisortoknowmore.

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Givearating:

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Average:4.3starsfrom3ratings
Latest

2comments

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Whatisyouropinion?

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SubothSingh

afterannounceIfIbuysharesbeforeexbonusdate,thenameligibleforbonusornot?
kindlysuggest.
2monthsago

JM

(0)

(0) reply(0)

JiteshMachchhar

Itsverygoodarticle.verynicelyexplained
3monthsago

(0)

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