Market rally fuels bonus issues, stock splits

The aim is to make shares more affordable for small investors.

Domestic companies are using the stock market rally to widen their equity base through bonus issues and stock splits.

In the past fortnight, 13 listed entities have either opted for a bonus issue or a stock split. These include Bajaj Auto, Dabur, TVS Motor, Kotak Mahindra Bank, Britannia Industries and Apollo Hospitals. Since August 1, the number of companies taking these routes is 33.

Stock splits and bonus share issues increase the number of shares outstanding by issuing more to the current shareholders. This is mainly done when the share price rises to levels that are either thought to be too high or much more than the price levels of companies in the same sector.

Market experts said this was due to the strong undercurrents in the domestic markets over the past few months. The main motive is to make shares more affordable to small investors, though the underlying value of the company does not change.

In case there is a two-for-one stock split, every shareholder having one share of the company is given an additional share. This has been the case in most recent bonus issues by Indian companies. So, if a company had 10 million shares outstanding before the split, it would have 20 million after, without any impact on the market capitalisation.

Ambareesh Baliga, vice-president, Karvy Stock Broking, said, “With share prices touching new highs, there is lesser participation. By issuing bonus shares and splitting stocks, companies are making it affordable for investors. This brings liquidity.”

At present, banking stocks are among the counters that have been witnessing large moves. There is talk that Oil and Natural Gas Corporation may go for a stock split.

Shares of Bajaj Auto had inched close to Rs 2,900 a share, far higher than that of other auto firms. The shares of Britannia Industries rose to as much as Rs 2,200 a share.

Jagannadham Thunuguntla, equity head at SMC Capitals, said, “In the current bull run, prices of various companies shot up and were beyond the reach of retail investors. So, companies are following the standard practice of splitting stocks and issuing bonus shares to attract retail investors at a price they can afford.”