Declaring Bonus Shares – It’s a Corporate Birthright

Diwali is fast approaching and both private sector and public sector employees start gossiping and speculating one month in advance about the likelihood of getting a fatter bonus pack this time around. After all, how your wife, kids and in-laws are going to treat you during ensuing Diwali largely depends on the large [ or small ] heart of your employer.

And as far as the owners of the company are concerned [ read shareholders ] the story is a bit different. There are three aspects of bonus shares that may be of interest to you as a shareholder of a company.

Indication of higher future profits

In simple terms, if say a company declares a 1 : 1 bonus, the total number of outstanding shares simply doubles but PAT remains the same because of which the EPS gets slit into half. Hence, sound financial logic would dictate that a company issues bonus shares only if it is reasonably sure of doubling/trebling its profits so as to ensure that earnings don’t get diluted.

Future dividend may increase:

A company would normally not declare bonus shares if a company is not too sure of increasing the dividend rate. Even, if the company retains the pre bonus dividend rate in tact, yet the overall cash outflow on this count will simply double in say a 1:1 bonus case.

So, a company should be able to churn out more profits to pay dividends on an enlarged equity base whilst taking care of its capex requirements.

Psychological value:

The declaration of the bonus issue may have a favourable psychological effect on shareholders. The receipt of bonus shares gives them a chance to sell the shares to make capital gains without impairing their principal investment. They also associate it with the prosperity of the company. Because of these positive aspects of bonus issue, it is usually received positively by the market. The sale of the shares, received by way of the bonus shares, by some shareholders widens the distribution of the company’s shares. This tends to increase the market interest in the company’s shares; thus supporting or raising its market price.

Following is a list of some companies that have declared Bonus recently. The list is indicative and contains only those companies whose record date occurs in current month only. .

Name of Company Ratio Record Date CMP Rs.

Savera Industrie	1 : 1	26-Oct-10	107.05
Birla Power Sol.	1 : 5	21-Oct-10	1.82
Indsil Hydro	2 : 3	18-Oct-10	102.75
Gold Rock Inves.	2 : 1	13-Oct-10	37.85
Tulive Developer	4 : 1	08-Oct-10	165.9
Baba Arts	1 : 1	01-Oct-10	11.06
B.L.Kashyap	1 : 1	01-Oct-10	39.7
Birla Cotsyn	1 : 5	01-Oct-10	0.88

I have my own doubts about the financial robustness of above companies except perhaps Indsil Hydro. The less spoken about Tulive Developers which has no Sales/Revenue to speak off and yet it generated profit in fiscal 2009-10 and now it declares bonus shares and that too in the ratio of 4:1 – now that really spins my head!

Never invest pre-bonus or post bonus cases unless you check the fundamentals of the company besides trying to gauge the future prospects of the company in question. That’s easier said then done.

And by the way, if your employer refuses to give you Diwali Bonus citing global turmoil and recession as the main culprit then do consider selling your bonus shares if you don’t wish to be treated as a stranger whilst dropping in at your in-laws place during the ensuing Festival of Lights!

Anyway, Happy Investing.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd