Bonus issues boost investor sentiment on Dalal Street

With stock markets on an upswing, many Indian companies are giving free shares to investors, boosting sentiment at these counters.

The latest to join the bandwagon is India’s second-largest two-wheeler maker, Bajaj Auto, which today said its board would meet on July 22 to consider a bonus issue. The company’s shares touched an all-time high of Rs 2,525 on the Bombay Stock Exchange (BSE) after the announcement, but pared some gains to close up 1.41 per cent to Rs 2,443.90 in an overall weak market. The benchmark Sensex fell 0.27 per cent, or 47.74 points, at 17,938.16.

In a bonus issue, a company offers free additional shares to shareholders in proportion to their holding. For example, if a company announces a 1:1 bonus issue, its shareholders receive one additional share for each share they hold.
 

HAPPY TIMES
Companies	Date of announcement	Ratio	Cash in hand* Rs crore
Renuka Sugars	25-Jan	1:1	491.16
Crompton Greaves	28-Jan	3:4	668.82
IVRCL Infras	28-Jan	1:1	340.12
Castrol	18-Feb	1:1	525.76
Cadila Health	25-Feb	2:1	250.70
Wipro	23-Apr	3:2	6487.80
Sterlite Ind	26-Apr	1:1	4018.29
ITC	18-Jun	1:1	4761.31
MMTC	29-Jun	1:1	5964.71
*Cash in hand = Cash & Bank + Loan to subsidary + unquoted units (According to latest Balance Sheet) Data source: Capitaline                             Compiled by BS Research Bureau

In this year so far, 53 companies have given bonus shares to their shareholders. These include Renuka Sugars, Crompton Greaves, IVRCL Infrastructures, Castrol, Cadila Healthcare, Wipro, Sterlite Industries, ITC and MMTC.

Market experts say bonus share issues don’t change anything fundamentally for the company but increase the confidence of investors. “They improve sentiment for the company among investors and benefits them in the medium to long term,” said Sudip Bandyopadhyay, managing director and CEO at Mumbai-based brokerage Convexity.

After bonus shares are issued, the stock price of the company adjusts depending on the ratio. For example, shares of Reliance Industries Ltd closed at Rs 2,193.75 on November 25, 2009, on BSE. However, the next day, the price more than halved to Rs 1,064.60 after investors got one free share for every share they held. This is just an adjustment of the share price based on the ratio. However, a lot of investors tend to think that the company’s stock price is low now.

“Optically, bonus issues give an impression to investors that the stock price is less,” said SP Tulsian, an independent investment analyst. Bonus shares could be beneficial only if investors were willing to hold the company’s stock for a long term, he added.