It’s that time of year again when companies start announcing bonuses and quarterly results. Here are a few updates on some of the stocks to keep an eye on:
Sheela Foam Ltd. will be issuing a bonus in the ratio of 1:1, with a value of Rs. 5/- per share. This bonus will be issued to shareholders on the ex-date of December 21, 2022.
Bombay Rayon Fashions Ltd. will be holding a board meeting on December 21, 2022 to consider and approve the standalone and consolidated un-audited financial results for the quarter and six months ended September 30, 2022.
Vivo Bio Tech Ltd. will also be holding a board meeting on December 21, 2022 to discuss a preferential issue of shares.
Pacheli Industrial Finance Ltd. will be holding a board meeting on December 21, 2022 to consider and approve the appointment of directors and a change of address for keeping the company’s books of accounts and papers.
Rhetan TMT Ltd. will be holding a board meeting on December 21, 2022 to discuss a bonus issue and stock split.
Zim Laboratories Ltd. will be issuing a bonus in the ratio of 2:1, with a value of Rs. 10/- per share. This bonus will be issued to shareholders on the ex-date of December 22, 2022.
Precision Wires India Ltd. will also be issuing a bonus, in the ratio of 1:2 with a value of Re. 1/- per share. This bonus will be issued on the ex-date of December 22, 2022.
Supreme Infrastructure India Ltd. will be holding a board meeting on December 22, 2022 to discuss quarterly results.
Nupur Recyclers Ltd. will be issuing a bonus in the ratio of 1:1, with a value of Rs. 10/- per share. This bonus will be issued on the ex-date of December 23, 2022.
It’s important to keep an eye on these updates as they can have a significant impact on the value of your portfolio. Make sure to consult with your financial advisor and do your own research before making any investment decisions.
A bonus share is an extra share of stock that a company gives to its current owners for free. The company gives its owners new or extra shares in the form of bonus shares when it doesn’t have enough cash to pay cash dividends to its shareholders, even though its sales are good. Bonus shares are given to shareholders in proportion to the number of shares and dividends they own, and corporations don’t charge their shareholders extra fees for giving out bonus shares.
Even if a company has a lot of money, it can still give out bonus shares to avoid the high dividend distribution tax. When companies declare dividends, they have to pay this tax.
Offer of Bonus Shares
When a company gives its shareholders bonus shares, this is called a “bonus issue of shares” or a “bonus share issue.”
Companies give out bonus shares based on a constant ratio formula that lets them give each shareholder the same number of shares no matter how many shares they already own.
Take the case of a shareholder who owns 100 shares of business ABC. The company has now decided to give bonus shares at a 2:1 ratio, which means that for every share a shareholder has, they will get two bonus shares. So, in exchange for their original 10 shares, the shareholder will now get 20 bonus shares.
When bonus shares are given out, the dividend per share goes down because there are now more shares.
When a bonus issue happens, the share price goes down, but the investment value of the shareholder doesn’t change because they now own more shares than they did before.
What’s good about bonus shares
Bonus shares are good for the company’s shareholders because they give the company more equity and make it easier for shareholders to get along with each other.
Investors may be willing to let the value of their shares go down because of the bonus share offering.
When a company makes a lot of money, the price of its stock goes up. So, when bonus shares are traded on secondary markets for liquidity, they give their owners a lot of money.
Record date and their ex-date
The record date is a cutoff date set by the company, and investors must be shareholders of the company before this date in order to be eligible for bonus share issues. Also, the ex-date is one day before the record date of the company.
In India, shares are put into a Demat account two days after the day they start trading. The company could give existing shareholders bonus shares before the Ex-Date and the Record Date. You must buy the business’ stock before the ex-date in order to be eligible for bonus shares.
Since the investor can’t buy the shares before the record date, any shares bought on the ex-date won’t be eligible for the bonus shares.
Conclusion
Bonus shares are added to a shareholder’s Demat account within 10 to 15 days of getting a new ISIN (International Securities Identification Number). Shareholders can log in to their online Demat accounts to see a statement that says bonus shares were delivered on a particular day, or they can wait for an SMS or email to tell them that bonus shares have been added to their Demat accounts.
Over the last few years, a number of companies have said they will buy back their own shares. Before we get into the details of buybacks in India, let’s look at how they work around the world. There are two ways for a company to buy back its own shares around the world. First, you can buy back the shares and keep them as “treasury stock” on the company’s balance sheet. The company uses this for treasury operations. Second, you can buy back the shares and get rid of them, which will reduce the number of shares that are still outstanding by that amount. In India, the first way isn’t allowed. Instead, shares can only be brought back to get rid of them.
So, why do companies buy back their own shares? Why does a company buy back its own shares? One needs to know what the benefits are for the company and the shareholders. The most important question is what shareholders can get out of buying back their own shares.
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1. Have a lot of money but not many projects to invest in
This is one of the main reasons why companies want to buy back their own shares. Indian IT companies like Infosys, TCS, Wipro, and HCL Tech had billions of dollars in cash on hand most of the time. Now, keeping money in the bank costs money, so it’s better to give it back to shareholders. A company like Reliance Industries may have billions of dollars in cash, but it also has huge investments in the telecom industry. Most IT companies use business models that have been around for a while, and there aren’t a lot of new projects to work on. One of the main reasons for buying back shares is that there is too much cash on the books and not enough investment opportunities.
2. Buybacks are a better way to reward shareholders because they save on taxes
This advantage became clearer in India after the 2016 Union Budget, when the government said that shareholders would have to pay a 10% tax if their annual dividends were more than Rs. 10 lakhs. Now, companies are taxed almost three times on the dividends they pay out. First, dividends are paid out after taxes have been taken out. Second, there is a dividend distribution tax (DDT) of 15% when the company pays out the dividend. Third, shareholders pay a 10% tax. Most of the 10 percent tax went to promoters and big shareholders. Even with the 10% tax on long-term capital gains that was added in the 2018 budget, buybacks are still a good tax deal.
3. In theory, buybacks tend to raise the value of a company
When a company buys back its own shares, the number of shares out in the market and the capital base go down. In this way, it makes the company’s EPS and ROE better. If the P/E stays the same, when the EPS goes up, the stock price should also go up. But in real life, it doesn’t happen very often. When a company buys back its own shares, it is seen as a business with few chances to grow and invest in the future. Since P/E ratios are usually based on growth, these companies tend to have lower P/E ratios. So, even though EPS goes up, the effect on valuation is usually about the same because P/E goes down.
4. The company can send a message that the stock price is too low
This may be the most important message that companies want to send when they buy back their own shares. The fact that the company is sure enough of itself to use its reserves to buy back its own shares suggests that the company’s leaders think it is undervalued. This is more important for stocks that have dropped sharply but don’t seem to have any major problems. In this situation, it might be a good idea for the company to buy back the shares to show that prices have hit rock bottom. Even though the stock may not rise sharply, it usually helps the stock find a bottom.
6. It can help the company’s founders get a bigger share of the business
There are times when the people who started a business may worry that their stake in it will fall below a certain level. A buyback is an offer, and it’s up to the shareholders to decide if they want to take it. If the promoters agree to the buyback, it keeps their stake in the business and gives them cash. On the other hand, if they don’t take the buyback, they can increase their stake in the company. This is very important if the company is afraid that another company will try to take it over.
In India, the only way to buy back shares is to get rid of them. Even though the effect on stock prices is still up for debate, there is no doubt that buybacks are a tax-efficient way to give cash back to shareholders.
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If a shareholder wants to take advantage of a rights offer, they will have to pay the rights price for the number of eligible shares. If a shareholder doesn’t want to buy more shares of the same company, they can either give up their rights or transfer them to someone else.
It’s easy: I have the right to buy more shares, but I give up that right in your name. This means that you, who may not even be a shareholder, can buy the shares at the rights issue price. I might charge you a fee for this “renunciation.” If the rights issue price is 500 and the company is trading at 700, I will charge 200 per right entitlement to give it to someone else.
What does “Rights Entitlement” mean?
This is a fairly new thing on the Indian stock market, where the rights themselves are traded.
When a company does a rights issue, it gives its shareholders Rights Entitlement (RE). As part of the rights issue, the same number of REs are given to each shareholder as of the record date. Using the same example as before, a person who owns 14 shares of Bharti Airtel will get RE for every 1 share they own.
Reliance Industries was the first company to give its shareholders their rights directly to their Demat accounts so they could trade them on the exchange platform.
When you sell a RE, you give up your rights and give them to someone else. The person who buys the RE is given the option to buy the shares.
If you have RE shares, that doesn’t mean you also have the rights shares. An investor needs to fill out an application for rights shares based on separate entitlements. RE lets rights holders who don’t want to buy more shares of the same company sell their RE shares on a trading window on exchanges to other willing investors for a price.
Shareholders who didn’t want to apply in the past had to let their RE expire. The renunciation process was complicated, and both the buyer and seller had to sign paper forms. But when the process is handled by the exchange, it’s much easier. All you have to do is click on your broker’s platform, and it’s sold. By giving out RE shares, investors can get some value from their RE shares.
Setting the price of RE
The difference between the stock’s market price at the time and the price at which the rights issue is being sold is used to figure out the price of the rights entitlements. Once the base price is set, price changes depend on how the market feels and how much demand and supply there is for the RE. For example, Airtel’s rights shares were being sold for 535, but at the time, each share of Airtel was worth about 681 on the market. So, RE’s base price, or what it was really worth, was 146. But on the first day, it went up by 40 percent and closed at around 205.
Why would someone pay more than 146 for an Airtel share? The answer is in the actual issue, which is not for regular shares but for partially paid shares. The money for these shares doesn’t have to be paid all at once. Instead, it will be paid in parts over time. This adds a layer of “optionality,” which is why the RE is worth more ( 205) than the “intrinsic” difference of 146.
Paid in part
When a company gets money from shareholders, it gives them shares that show how much of the company they own. You can pay for these shares in full or in part. When a share is fully paid, the company gets the whole amount at once. When a share is only partially paid, the company gets the money over time. If a business goes the second route, it doesn’t have to raise all of the money at once. Also, it gives shareholders more time to pay for their shares.
Investors can buy a company’s stock at a lower price if some of the shares have already been paid for. But they have to pay the rest of the payments when they are due. Once all the payments are made on these shares, they are turned into fully paid shares and traded at the same price. (These shares don’t come with as many voting rights or dividends.)
For example, each share of RIL’s rights issue costed Rs 1257. But the company was supposed to get the money in three parts from the shareholders –
314.25 at the time of allotment, 314.25 by May 31, 2021, and 628.5 in November 2021 for the last payment. Tata Steel was the first company to list its partially paid shares on the bourses.
Price of shares that are “partially paid”
Like fully paid shares, these partly paid shares can be bought and sold on stock exchanges. Their price depends on how much the company’s fully paid-up stock is worth, how much of the instalment has been paid, how much time is left to pay the rest, how volatile the stock is, and, of course, how much people want to buy them. The issuance price or base price is the part of the amount paid for a partially paid share.
For example, on June 15, 2020, RIL partially paid shares were listed. On the day the shares were put on the market, they were listed at Rs. 698, which was more than double the base price of 314.25. The difference comes from the fact that:
There was still about Rs 943 to be paid. The price of a fully paid share of Reliance was Rs. 1615. The price of the PP (partially paid) share should have been 672, which is the difference between Rs. 1,615 and Rs. 943. But it was sold for Rs 698. The slightly higher price takes into account how volatile the money is and how much it will be worth in about 1.5 years when Reliance was expected to get the remaining money. Since then, Reliance has paid 314.25 for the second call, bringing the total amount paid to 628.5. The PP trades at 1,944 in October 2021, which looks like a return of more than 200 percent. However, this is mostly because the partly paid share has built-in leverage that makes it act like an option contract.
In a rights issue, a company gets more money by giving more shares to people who already own shares.
That is, if you own a share, you have the “right” to buy more shares at a certain ratio and price. For example, a 10:1 issue means that for every TEN shares you own, you can buy ONE more. Rights are only given to shareholders whose names are on the company’s register of shareholders on a “record date.” This date is usually a few days after shareholders approve the plan to sell rights to raise money.
Why Does It Matter?
If a company wants to raise money through a Follow-on public offer, it has to go through a long process that includes getting merchant bankers to price the issue, SEBI approving the offer document, etc. There are also a lot of fees that have to be paid.
The rights issue is the fastest and least expensive way for the company to get money. The company saves a lot of money on costs like underwriting fees, advertising costs, and so on that it would have had to pay for if it had used another way to raise money.
Why is the rights regulator not as strict? The reason for this is that an existing shareholder already knows a fair amount about the company, so she doesn’t need as much scrutiny and information as when selling shares to new shareholders.
Also, in a rights issue, the promoter’s share of the company doesn’t go down, which doesn’t happen in any other way of raising money through equity. Most of the time, promoters agree to buy all of their rights and the rights that were not bought.
Pricing and ratio of rights
Most of the time, the price of a rights offer is lower than the market price, and allotment is guaranteed. If the rights are sold for about what they are worth on the market, existing shareholders may not be too interested.
A company decides how many rights shares to offer based on how much money it wants to raise and at what price. For example, Bharti Airtel decided to raise 21,000 crore at 535 by giving its current shareholders one more share for every 14 they already owned on the record date. This means that a shareholder with 14 shares will be able to buy another 1 share for Rs. 535. At the time, the market price was much higher, around 680 per share.
The ratio says for sure how many shares each person will get. But one can also try to get more shares.
Also, these Rights can be traded on their own for a limited time, so shareholders can sell them to other investors on the stock exchange. For example, the recent Bharti Airtel Rights were traded on the exchanges under the name “AIRTEL-RE-BE” for a short time. The price of this script was 203. This means that a person with Airtel Rights could buy an Airtel share for 203 + 535, which is 738. At that time, one share of Airtel costed 687.
Factor of Shareholding
When a company issues more shares, its Return on Equity and EPS (Earnings per Share) will go down. But if the rights offer is fully taken advantage of, an investor’s share of the company doesn’t change. For example, if a shareholder-owned 5% of a company before rights, he would still own 5% of the company after rights if he bought his rights shares. If the shareholder doesn’t take advantage of the rights offer, his share of the company would go down (since others will buy and their shareholding goes up).
If you apply for more shares than your rights allow, you can buy more if a few investors don’t subscribe.
Every investor looks to the stock market for shares that will make him money. But sometimes investors can’t buy shares of a popular company. The reason is that the share price is so high. Companies decide to split their shares when this happens.
Stock split, as the name suggests, is when the face value of a stock goes down and the number of outstanding shares goes up at the same time. The main goal of a stock split is to make the stock easier to buy and sell, so that investors can buy more of it. Companies do stock splits when they realise that the price of their shares is too high or is higher than the prices of their peers.
For example, if a company does a 1:10 stock split, a stock with a face value of INR 1000 is split into 10 shares with a face value of INR 100. But keep in mind that the company’s share capital doesn’t change. This means that a stock split is nothing more than a cosmetic change, and that the news of a stock split won’t affect the price of the stock in a way that will lead to unusually high returns. Even if there is information in the announcement, it is most likely to show up as unusual returns on the day of the announcement, which is called the record date.
There are some ideas about why companies split their stocks: Signaling: a stock split is a sign that the company will grow in the future. This is because real-world studies of stock splits in developed economies have shown that the day after the announcement of a stock split, returns are often unusual.
Optimal trading range:
On every stock market, stocks tend to trade in a certain range. As we’ve already said, stock splits are done to get the price of the stock back into the normal trading range. This lets more investors buy shares.
According to this theory, the goal of bringing the stock price back to the usual trading range is to improve liquidity, which will lead to investors making more money.
This is a way for small or ignored firms to get the attention of the market. This is done by a company that feels it has been undervalued in the market because market participants haven’t shown much interest. So, companies use stock splits to get more attention and make sure that more investors can get information about the company. This is more important for small businesses than for big businesses.
What do investors get out of a stock split?
In a stock split, the number of shares goes up, but the value of each share goes down. This makes it easier for new investors to get interested in the company’s stock and buy some. In other words, the number of shareholders could grow if more investors bought at lower prices.
It looks like investors who bought the split share at a lower price may not benefit from the stock split. But if the share price goes up, it could be because of a stock split. This tells the market that the share price of the company has been going up before the split, so investors think that the growth will continue in the future.
So, after a stock split, should you buy a share? Before 1999, SEBI only let INR 10 and INR 100 be used as face values. Today, the split ratio can be 2:1, 10:1, 5:1, or any other number.
A few reports suggest that the trading range theory is wrong because most stock splits are announced for stocks that were already trading at low prices.
So, market experts have seen that the price of a share after a stock split depends on how the market is doing and how well the company is doing. Before investing in a share after a stock split, make sure you keep the above two points in mind. There’s no need to say that the market will always have mixed feelings about stock splits. Also, one last thing: don’t confuse a bonus with a stock split. Bonus shares only change the company’s issued share capital. A stock split, on the other hand, changes the company’s authorised share capital.
