Bonus share issues fall 22% in FY09

The financial year 2008-09 saw only 55 firms declaring bonus shares, compared with 71 a year earlier and 86 in 2006-07. Of the 55, nine firms were from the financial sector, four each from information technology (IT) and real estate sector, and three each from mining and pesticides sector.

Not a single company from the auto ancillaries and entertainment sectors declared bonus shares during 2008-09, as against over four firms issuing bonus shares a year earlier. Only three mid- and small-sized IT firms – Kaashyap Technologies, Compucom Software and Jetking Infotrain – issued bonus shares in FY09, down from 13 IT firms in 2008. The engineering sector saw just two companies – Larsen & Toubro and Gujarat Apollo Industries – declaring bonus shares, compared with five in 2008.
 

BLOW TO BONANZA

* 55 firms declared bonus shares in FY09

* It was 71 in 2007-2008...

*...And 86 in 2006-07

* Of the 55 firms this year, 9 were from the financial sector

* 4 each are from IT and realty sectors

WHEN ARE BONUS SHARES ISSUED?

Bonus shares are issued to existing shareholders by converting free reserves or share premium account to equity capital without taking any consideration from the investors

Interestingly, there were over 100 companies with a track record of regularly issuing bonus shares and with huge free reserves during the year to continue the trend. These firms should have been able to reward bonus shares to their shareholders. If fact, the companies in question had free reserves (general reserves plus share premium) of more than ten times their share capital at the end of financial year 2008.

But the lack of bonus issues during the last financial year suggests that these companies, despite having high reserves, were reluctant to dilute equity earnings per share after seeing a slowdown in their earnings growth rate due to the economic recession.

For instance, Sterlite Industries, which issued bonus shares in 2006, had free reserves of Rs 15,046 crore as on March 31, 2008. That was 106 times the issued equity capital. The company commissioned significant capacity expansions in its zinc and aluminium business in 2008. As is known, metal prices on the London Metal Exchange (LME) declined by an average of over 40 per cent in the last one year, resulting in a 10 per cent decline in the company’s consolidated earnings in the nine months ended December 2008.

Bonus shares are issued to existing shareholders by converting free reserves or share premium account to equity capital without taking any consideration from the investors. These shares do not directly affect a company's performance, but the additional shares reduce accumulated profits, while expanding the equity base.

As a result, a bonus issue is taken as a sign that the company is in a position to service its larger equity. It means that the management is confident of being able to increase its profits and distribute dividends on all these shares, including the bonus ones, in the future.

If companies of high networth and which showed a handsome growth in the nine months ended December 2008 are taken into consideration, then bonus issues could have been issued by Sun Pharmaceuticals, Infosys Technologies, Engineers India, Federal Bank, Matrix Laboratories, KS Oil, Punjab Chemicals, FDC and Tube Investment.

But companies across sectors such as IT, engineering, pharmaceuticals, metal, auto ancillaries and even sugar, and most of which had rewarded bonus shares to their shareholders during boom times, shied away from doing the same last year. The reason is that most of the high book value companies reported a decline in net profits in the nine months ended December 2008. Hence, they did not want to dilute capital and reduce earnings per share (EPS).

Among the top 100 high networth companies, as many as 12 could not consider bonus shares as they had issued FCCBs in the past, which could bloat equity capital on conversion. It seems, companies just wanted to cut their coat according to the cloth they had.