Based on the speed of announcements, the issue of equalization shares this year could exceed the recent peak in 2018, when 78 companies had given shareholders free shares. More than 90 companies issued bonus shares in 2010. “FY22 has seen strong growth in corporate profits and this confidence has been reflected in bonus issues,” said VK Vijayakumar, Chief Investment Adviser,
. “It’s a clear turnaround in profitability.”
A change in tax rules to curb so-called bonus stripping may also have led companies to issue bonus shares, according to a tax adviser.
In the budget for February this year, the government amended the 94th paragraph. Item 8 of the Income Tax Act to stop the practice of bonus review. The new arrangement will apply from 1 April 2023.
Bonus shares are additional shares that a company gives to its current shareholders for free based on the number of shares they own. For example, a company could give one bonus share for one share owned or two bonus shares for each share owned by the investor.
The company pays for the equalization part of its profits or reserves, which means that there is no outflow of money, unlike dividends where shareholders receive cash.
This issue is called the reserve fund’s equity capital, which means that the accumulated reserve fund of profits is converted into share capital by issuing equalization shares.
Bonus shares improve liquidity as the company’s share price decreases according to the issue ratio. Lower price of scrap tends to increase retail participation.
When financially strong companies announce bonus shares, it increases investors’ confidence in the company.
,,,,,, and are among 67 companies that have either issued equalization shares or announced listing dates to consider expanding their capital base with bonus shares. The listing date is the deadline set by the company to compile a list of shareholders entitled to the equalization shares.
An additional six companies, among others, have convened board meetings to discuss bonus shares, totaling 73.
Profit and tax rules
Corporate profit increased by 48% on FY22 and the corporate profit ratio of GDP rose to 4.3% from a minimum to 2.2% on FY20. Banks, financial services, insurance (BFSI), information technology, energy and metals led the recovery.
“In the post-pandemic economic recovery, global economic conditions created opportunities for companies across sectors such as metals, chemical products, independent refineries, agricultural processing, real estate, among others, to generate healthy profits,” said Gaurav Dua, Sharekhan’s Chief Financial Officer.
“Companies are rewarding shareholders with either acquisitions, bonus issues or special dividends, depending on their business plans and board decisions,” Dua said.
Changes to the tax rules from April 1, 2023, to prevent bonus recalls, have also encouraged bonus announcements.
Bonus stripping is a common method used by project managers of smaller companies or investors to save capital gains tax. Investors or owners sell shares after a bonus issue when share prices fall. Because the original shares are sold at this lower price, investors book lower capital gains or even losses in some cases, which helps save tax. Shareholders then hold issued equalization shares.
The new tax rules stipulate that original items must be retained for a certain minimum period of time in order to claim tax benefits from compensatory items.
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