Bonus share issues boom in show of corporate strength

Bonus share issues boom in show of corporate strength

Mumbai: More than 20 companies have announced bonus share offers within a mere six-week span, bringing the total number of bonus issues for 2024 to 35 thus far. That compares with 90 companies that issued bonus shares in the last calendar year. Experts attribute the surge to burgeoning earnings and a brighter business outlook, while cautioning that, in some instances, this may be driven by attempts to artificially inflate stock prices amid a bull market overreaction. They advise a cautious approach in such circumstances.

Bonus shares refer to additional shares that a company distributes to its existing shareholders at no extra cost. These bonus shares enhance liquidity, reduce the per-share value of a stock, and foster greater participation from retail investors, according to market participants.

“The trend of bonus share issuance by companies should be interpreted by investors as a sign of the company’s strength and potential for growth,” said Dinesh Thakkar, chairman of Tradebulls Securities.

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May break 2022 record of 124 issues

“Bonus shares can increase market liquidity and make the company more appealing to prospective investors, without depleting the company’s cash reserves,” said Thakkar of Tradebulls.

Capri Global, Newgen Software Technologies, Gujarat Ambuja Exports, Paisalo Digital, KPI Green Energy, Sandur Manganese & Iron Ores, Allcargo Logistics, SG Mart, Choice International, Salasar Techno Engineering and KP Energy are among those that have either given out bonus shares or announced a record date for their issuance.

The record date serves as a cut-off point established by the company to determine the list of shareholders entitled to receive the bonus shares.

Newgen, which declared a 1:1 bonus last month, reported a 33% increase in revenue to Rs 771 crore for the nine months ended December 2023, compared with the year earlier. Profit rose 44% to Rs 147 crore. That growth rate has been outstripped by the stock, which has rallied 252% over the course of the year.

Investors may view this as an encouraging sign that the business is making enough money to be able to afford these kinds of shareholder rewards, said analysts.

“Bonus shares serve as indicators of India’s expanding economy and the subsequent growth in company earnings,” said investment banker Ravi Sardana. “Nevertheless, investors must exercise caution, as some companies may announce bonus shares merely to inflate their stock prices artificially.”

Interestingly, about 10 of the 35 companies that announced bonus shares are below Rs 500 crore in market capitalisation.

If the trend continues, the number of firms issuing bonuses will surpass the previous record of 124 in 2022. In 2021 and 2020, 71 and 40 companies allotted free shares, respectively.

Several companies issued bonus shares after the government amended Section 94(8) of the Income Tax Act in the February 2022 budget to stop the practice of bonus stripping, starting April 1, 2023.

“The issuance of bonus shares enhances the company’s image in the market, thereby gaining the trust of existing shareholders, attracting other players and increasing the free float of the company’s shares,” said Manish Chowdhury, head of research, StoxBox.

Bonus shares are essentially paid from the profits or reserves of the company and do not involve cash flows, unlike dividends. When financially strong companies announce bonus shares, it boosts investor faith.

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