Theoretically, issue of bonus shares
should not connote any value to investors. Although, the shareholders receive
additional stock certificates, their proportionate ownership remains unchanged.
Even the market lot size is proportionately increased after allotment of bonus
shares. But it is seen that the correction in actual market price is not exactly
in proportion to the size of bonus issue. For a 3:1 bonus issue, the ex-bonus
market price would definitely not become one-fourth of its current price. For
example, when Infosys declared a 1:1 bonus in 1999, the unadjusted closing share
price before ex-bonus date in late January/early February, 1999 was hovering
around Rs 4,800-Rs 4,950. The ex-date of bonus issue was 8 February 1999. Of
course, there was an immediate correction in the price on that day, but the
price reached Rs 3,000 by the end of that month. This indicates that bonus
shares unlock shareholder wealth. However, the market price does undergo major
corrections post-bonus and this brings more liquidity to the stock due to its
availability in a lower and more popular trading range.
A firm may retain a larger part of its earnings for reinvestment purposes, pay less in form of cash dividend and yet provide better shareholder return by way of issue of bonus shares. As the ex-bonus share price would not fall as much, the total return to shareholders would increase. Issue of bonus shares also has a signalling effect. It indicates management’s confidence in the future earning potential of the firm. However, one should not ignore the flip side of bonus issue. Issue of bonus shares would increase the cash dividend for the future.
The recent spate of high cash as well as stock dividend announced by Indian software giants seems to defy the theoretical foundation of bonus shares. These lucrative announcements only indicate that these giants are flush with enormous cash profits which they want to disgorge through hefty cash dividends. At the same time they are confident of their future earning potential and hence issue bonus shares to allow shareholders to participate profitably in the future wealth creation.
(The author is Professor, IIM, Lucknow)
A firm may retain a larger part of its earnings for reinvestment purposes, pay less in form of cash dividend and yet provide better shareholder return by way of issue of bonus shares. As the ex-bonus share price would not fall as much, the total return to shareholders would increase. Issue of bonus shares also has a signalling effect. It indicates management’s confidence in the future earning potential of the firm. However, one should not ignore the flip side of bonus issue. Issue of bonus shares would increase the cash dividend for the future.
The recent spate of high cash as well as stock dividend announced by Indian software giants seems to defy the theoretical foundation of bonus shares. These lucrative announcements only indicate that these giants are flush with enormous cash profits which they want to disgorge through hefty cash dividends. At the same time they are confident of their future earning potential and hence issue bonus shares to allow shareholders to participate profitably in the future wealth creation.
(The author is Professor, IIM, Lucknow)
