• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

S. Vaidya Nathan

Announcements of bonus offers and stock splits have led to a sharp rise in share prices. The magnitude of price increase is unwarranted in quite a few cases.

EVEN as equity market continues to be volatile and hovers about 12 per cent off highs, announcements of bonus offers and stock splits have led to a sharp rise in share prices. The magnitude of price increase is unwarranted in quite a few cases.

The Unichem Labs stock, for instance, doubled after the announcement of a bonus and stock split. Berger Paints' stock rose by about 50 per cent. Jubilant Organosys' stock, after a relentless uptrend that took the price past the Rs 1,000-mark, has settled ex-bonus at about Rs 715.

In each of these instances, there has not been any significant change in the business fundamentals to warrant the magnitude of the price spurt.

Bonus offers and stock splits are wealth-neutral. Immediate gains may also be transitory. Such corporate actions can have a sustained positive effect on valuation, which may, however, be reflected only over a longer time frame.

The enhanced number of shares may lead to higher liquidity in the stock. This may lead to a higher price-earnings multiple (PEM). The likelihood of a higher PEM will also be valid only if the earnings growth story does not lose momentum.

The trends over the past nine months are a contrast to the lukewarm response that bonus offers and stock splits used to elicit earlier.

For instance, when Elgi Equipment split its stock about two-and-a-half years back, it had no effect on valuation. It was only when the fundamentals gathered strength that the stock began to attract interest in 2003, aided by enhanced liquidity.

The Elgi experience suggests that if the market moves into a sluggish phase, such actions may not lead to the nature of uptrend that has been seen over the past year.

Companies that completed the process in the bull market may also find their stocks being marked down subsequently.

The magnitude and pace at which prices get ramped up following such announcements also provide opportunity for informed trading.

The possibility of management and market operators acting in tandem to announce such corporate actions and profit from the inevitable uptrend in bullish market conditions cannot be ruled out.

At present, such actions can take effect over a two three-month period depending on the pace at which the legal formalities are completed.

SEBI needs to tighten the time-frame to minimise the scope for abuse. There has been no instance of shareholders not approving a stock split or a bonus offer.

The possibility of changing the law to allow stocks to trade on an ex-stock split or bonus basis with a specified period of, say, 15 days from the date of announcement by the board of directors has to be considered.

This would represent a substantial change from the present system. But it may an idea worth pursuing. If, in the rare case, shareholders disapprove of the move, there must be the flexibility to restore status quo.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line