India Inc loosens purse strings to dole out bonuses as promoters see exit opportunity

A bonus issue, as the market generally perceives it, is a reward to the shareholders for being loyal to the company. But, what if the same is being used as an opportunity to encash the existing holdings by the most loyal among them. For the uninitiated, we are talking about the promoters here. An increasing number of companies have been doling out bonus shares since the past few months. This has come as a golden opportunity for some promoters waiting to take a quick exit from their holdings, thanks to the bonus-triggered boost in liquidity in the shares.

As many as 39 companies offered bonus issues in the quarter ended December 31, 2022, compared to 36 in the previous quarter and 26 in the April-June period. The list includes some fundamentally decent companies such as FSN E-Commerce Ventures, Easy Trip Planners, Sheela Foam, Maharashtra Seamless, Motherson Sumi Wirings, Shivalik Bimetal Controls, Insecticides India, Ram Ratna Wires, among a few notable examples. FSN E-Commerce Ventures was the most generous among them as the Nykaa management doled out a very liberal bonus issue of 5 shares against 1 share. It is followed by Easy Trip Planners which offered 3 shares for each held by its shareholders. Most of the others offered a 1:1 bonus.

Joining the bonus bandwagon of fundamentally sound companies were a host of other small and mid-sized companies across sectors. A look into the trading pattern in their shares showed a surge in level of activity in many illiquid counters post announcements. A few of them witnessed some promoters selling amid increased retail participation in trading. According to analysts, bonus-triggered momentum offers a good opportunity for promoters and other related entities to exit their holdings at higher prices amid improvement in volumes and share price.

"There may be cases where promoters used bonus issues to offload their shares on unsuspecting investors while prices remained buoyant" said Alok Churiwala, managing director & CEO, of a Mumbai-based securities firm Churiwala Securities. But, he does not feel such a tendency is rampant among promoters of large companies. "A few platform companies were also seen issuing bonus shares and buying back shares probably with an intention to make good the loss suffered by the shareholders on purchase of equity at ridiculously high valuations in IPOs"

Among a few shortlisted bonus-issuing companies witnessing promoter selling in the market, Navoday Enterprises offered bonus in the ratio of 1 for each share held by the shareholders. The stock became ex-bonus (price adjusted on the basis ratio) on November 29, 2022, ahead of which the counter witnessed a sharp rise in volumes and the share price. Daily volumes surged in the range of 1.3 lakh shares to 4.2 lakh shares during 17 to 28 November, compared to a daily average of 67,800 shares during 1 to 16 November. The stock rose consistently from Rs 9.30 on November 21 to Rs 12.4 on November 28 on the BSE. Interestingly, according to disclosures filed with the BSE, some of the promoters collectively sold over 7 lakh shares in November, reducing their stake substantially in the company.

Janus Corporation is another example where the promoters reduced some stake after bonus announcement. They offloaded over 8 lakh shares in the market between 17 and 25 November -- the week which saw the share price jump from Rs 8.6 to Rs 10.5 amid growing volumes. The stock had been quoting below par due to lacklustre activity for many months though it gained momentum briefly in November. The counter attracted huge volumes of 7.41 lakh shares on November 25, just a day ahead of the ex-bonus date. Janus Corporation offered a 4:3 bonus to the shareholders.

While tracking a trend prior to the last 2-3 quarters it was found that even promoters of fundamentally better companies had pared their holdings after bonus announcements. For instance, one of the promoters of the Rs 1,200-crore fintech company Infibeam Avenues sold a major chunk of his holding after the allotment of bonus shares in March this year. The person sold 75 lakh shares, reducing the stake from 1.6% to 1.3%, between 23 and 25 March, according to disclosures filed with the BSE. The company offered a 1:1 bonus this year and also in 2021, according to BSE data.

Star Housing Finance is another profit-making company witnessing some promoter selling amid bonus and stock-split euphoria. The company offered a 1:1 bonus in addition to a sub-division of its shares from Rs 10 to Rs 5. Over 1 lakh shares were sold in the open market on December 13, just a day before the bonus and stock split became effective.

The gains in most of these stocks proved short-lived, causing a substantial capital loss to those entered at higher levels amid the bonus euphoria. Shares of Navoday Enterprises, Star Housing Finance and Infibeam Avenues have lost between 12% and 40% over their Ex-bonus levels, partly on account of generally uncertain market conditions over a renewed global Coronavirus threat and fears of recession in the US.

(The author is former journalist-turned-entrepreneur)

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