Corporate Strength: Boom in Bonus Share Issues Signals Market Confidence

By Consultants Review Team Friday, 16 February 2024

The corporate landscape has witnessed a surge in bonus share offerings, with over 20 companies unveiling such plans in just six weeks, bringing the total number of bonus issues for 2024 to 35 thus far. This uptick contrasts with the 90 companies that issued bonus shares in the preceding calendar year. Analysts attribute this trend to robust earnings and an optimistic business outlook, though some caution against potential efforts to artificially inflate stock prices during a bullish market phase.

Bonus shares represent additional shares allocated by a company to its existing shareholders at no additional cost. This strategy aims to bolster liquidity, reduce the per-share value of stocks, and encourage greater retail investor participation, industry experts note.

According to Dinesh Thakkar, Chairman of Tradebulls Securities, the trend of bonus share issuance should be viewed positively by investors, signaling a company's strength and growth potential. Additionally, bonus shares can enhance market liquidity and attractiveness to potential investors without depleting a company's cash reserves.

Several companies, including Capri Global, Newgen Software Technologies, and Gujarat Ambuja Exports, have either distributed bonus shares or announced record dates for their issuance. The record date serves as a cutoff to determine the shareholders eligible for receiving bonus shares.

Newgen Software Technologies, for instance, reported a significant increase in revenue and profit for the nine months ending December 2023, preceding its 1:1 bonus declaration last month. The stock's impressive rally throughout the year reflects investor confidence in the company's financial performance.

While bonus shares are viewed as positive indicators of India's expanding economy and corporate earnings growth, investment banker Ravi Sardana advises caution, warning that some companies may use bonus share announcements to artificially boost stock prices.

Interestingly, approximately 10 of the companies issuing bonus shares have market capitalizations below Rs 500 crore, indicating a broad-based trend across different market segments. If this momentum persists, the number of firms issuing bonus shares could surpass the previous record of 124 in 2022.

The issuance of bonus shares gained traction after the government's amendment to Section 94(8) of the Income Tax Act in the February 2022 budget, aiming to curb bonus-stripping practices. Manish Chowdhury, Head of Research at StoxBox, highlights that bonus shares enhance a company's market image, instill trust among existing shareholders, attract new investors, and increase the free float of shares. Overall, the distribution of bonus shares from company profits or reserves, without involving cash flows, reinforces investor confidence, particularly when undertaken by financially robust companies.

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