Going by the pace of announcements, bonus share issuances this year could exceed the recent high of 2018, when 78 companies had given out free stock to shareholders. More than 90 companies gave bonus stock in 2010. “In FY22, there has been an explosive growth in corporate profits, and this confidence has manifested in bonus issues,” said VK Vijayakumar, chief investment strategist,
. “There is a clear turnaround in profitability.”
A change in the tax rules to curb so-called bonus stripping may also have prompted companies to issue bonus shares, tax consultants said.
In the February budget this year, the government amended Section 94(8) of the Income Tax Act to stop the practice of bonus stripping. The new regime will be applicable from April 1, 2023.
Bonus shares are additional shares a company gives free to its existing shareholders based on the number of shares they hold. For instance, a company could give one bonus share for one share held or two bonus shares for every share owned by the investor.
The company pays for bonus shares from its profits or reserves, which means there is no cash outflow, unlike dividends where shareholders receive cash.
This issuance is called capitalisation of reserves, meaning accumulated reserves from profits are converted into capital by issuing bonus shares.
Bonus shares improve liquidity as the price of the company’s share falls depending on the issuance ratio. Lower scrip prices tend to increase retail participation.
When financially strong companies announce bonus shares, it boosts investor faith in the company.
, , , , , , and are among 67 companies that have either issued bonus shares or announced record dates for considering expansion of the equity base through bonus stock. The record date is the cut-off set by the company to compile the list of shareholders eligible for the bonus shares.
Six more companies, including , have called board meetings to consider bonus shares, taking the total to 73.
Profits and Tax Rules
Corporate profits surged 48% in FY22, lifting the corporate profit-to-GDP ratio to 4.3% from a low of 2.2% in FY20. Banks, financial services, insurance (BFSI), IT, energy, and metals led the recovery.
“In the post-pandemic economic revival, the global economic conditions created an opportunity for companies across sectors such as metals, chemicals, standalone refineries, agri-processes, real estate, among others, to generate healthy profits,” said Gaurav Dua, head – capital market strategy, Sharekhan.
“Companies are rewarding shareholders either through buybacks, bonus issues or special dividends depending upon the business plans and decisions of board members,” Dua said.
Changes in tax rules from April 1, 2023, to prevent bonus stripping have also encouraged bonus announcements.
Bonus stripping is a common method used by promoters of smaller companies or investors to save capital gains tax. Investors or owners sell shares after a bonus issue when the share price falls. Since the original shares are sold at these lower prices, investors book a lower capital gain or even a loss in some cases, helping save tax. Shareholders then keep the bonus shares issued.
The new tax rules provide that original shares have to be held for a certain minimum period to claim tax benefits from bonus shares.