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Why have bonus shares nearly died out in the Indian capital markets?

18 Dec 2015 |By: Team Finalaya

Bonus Shares in Indian Stock Market

Till the turn of the last century, bonus shares issued by top performing companies acted as a major trigger in the Indian stock markets with respect to the particular company’s shares and also the general market mood.  During those days, Reliance Industries had set a stellar record in adding to shareholder value consistently through issue of bonus and right shares.  When we analyze the initial equity base of Reliance and compare it with the latest position, we can see how Reliance has helped several retail investors build wealth through the equity route.

A radical change in approach to shareholder value

Sadly, ever since the dawn of the new century or just around the turn of the last century, companies somehow concluded that regular payment of dividends is adequate and shareholders, particularly the small investor will remain happy.  In the past, free reserves of a company as a ratio to their equity capital used to be a part of the result analysis. Companies that had 300% or more free reserves to their equity capital were considered good candidates for a bonus issue.  Many companies also responded to the expectations of the street with bonus issues.

No one seems to be questioning either

As we moved into the 21st century, many companies as well as analysts nearly stopped speaking about free reserves or how the company would add to shareholder value using the free reserves. Instead,  many of them swelled the equity base through splits and/or other means which only helped the liquidity of the stock in terms of numbers than add any specific value to the retail investor.  Consequently, it is not uncommon to see companies declaring dividends in high percentages like 500 or even 1000 % of the face value of the share that is often Re.1 /-  But no one speaks about anything beyond the dividends for the shareholders. Surprisingly, this question appears to have been skillfully buried by the experts and analysts as well.

Many companies sitting on tons of free reserves

Oracle Financial Services, Piramal Industries, Grasim Industries are just some of the companies at the top of the list of these cash rich companies that do not seem to be in any hurry to part with what is legitimately the shareholders’ wealth. Obviously shareholders, whether institutional or retail, are always happy to be part of a cash rich company. But if that cash merely remains on paper with no tangible gain accruing to the shareholders, then the shareholders possibly suffer lost opportunities.

Stock splits

Some may argue that stock splits, which the Indian corporate has embraced in a big way in recent times, have the same effect of bonus shares.  Although it may enhance the liquidity of the stock, it does not add to the wealth of the shareholder – barring some rare exceptions though.  Finally, it is only legitimate that the shareholders’ wealth is given back to them within a reasonable time frame.

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