The Hindu Business Line : Bonus issue versus stock split

At first flush, they may appear to be the same especially in the eyes of a person not well-versed in finance. But there are fundamental and visceral differences. When a bonus issue is made, the company's share capital is increased with a concomitant decrease in its Reserves and Surplus. But when a share is split, say, from Rs 10 denomination to Re 1 denomination, there would neither be an increase in the share capital nor a concomitant decrease in the reserves of the company.

This is because while in a bonus issue a person having one share of Rs 10 face value would get another share of the same face value should the company go for a 1:1 bonus what would happen in a stock split is his one Rs 10 share would now be converted into ten Re 1 shares.

Stock split may, therefore, appear to be more illusory than bonus issue. But it does make the shares more affordable in the market. For example, if a Rs 10 share is quoting at Rs 1,200 per share, this may deter investors from buying the same but if it is split into 10 shares then theoretically a Re 1 share quoting at Rs 120 may not frighten away potential investors.

While a decision as to stock split does not have many imponderables, a bonus issue is fraught with grave implications, involving as it does permanent increase in the capital with implications for future serviceability of the enlarged capital in the light of market expectations.

Demerger gains

WHAT are the advantages of demerger?

Bankey Behari Aggarwal,

New Delhi

Contrary to the surface impression, demerger is not the reversal of merger. The term is used interchangeably with the term `spin-off'. It has unique applicability to conglomerates that are multi-division or multi-product companies. Demerger was the rage a few years ago on the back of the core competence theory which says that a company should stick to its knittings and not flirt with all and sundry activities. A petrochemical giant should focus only on petrochemicals.

This theory naturally triggered a spate of demergers under which divisions were converted into separate companies so that they could focus pointedly on their respective activities. Conglomerates, according to the protagonists of core competence theory, dilutes focus and makes management clumsy. But this theory of late is being revisited. The flip side is conglomerates ensure that all eggs are not put in one basket. Conglomerates tend to take cyclical and other vicissitudes in their stride.

Loss set-off

OUR company has two divisions. Can the loss of one be set off against the profits of the other while calculating the overall tax liability of the company?

Arti Mukerjee, Kolkata

Very much. Tax liability is not that of a division but that of the company. Therefore, loss of one can be set off against the profits of the other. If the loss is so sizeable that it remains unabsorbed still, it can be carried forward so as to be set off against the business income of the company within the next eight years.

VRS delay

I AM a PSU employee. I applied for VRS pursuant to a scheme invited by the company in October 2000. My application was sanctioned and I was informed in writing that I will be relieved on March 31, 2001. As per our company policy, the employee concerned is called for a formal send off with relieving letter and VRS ex-gratia amount by cheque. In my case, I was not given such a thing and was orally told by our chairman to continue. Without specifying any time limit, I was told that I will be released whenever I so desired. I continued. Afterwards, I was called to appear for promotion interview like any other candidate and even I was transferred to one of the subsidiary company just like any regular employee. I on my part neither objected nor insisted on any communication in writing to withdraw the sanction for release under VRS. I am still continuing. Can I request the management to give effect to the sanction and release me under VRS with immediate effect? Currently, the company does not have any VR scheme. If the management, on some pretext or other, does not release me, can I get myself released by submitting my resignation and later file court case?

Anonymous, e-mail

Being a matter with legal implications, it would be difficult to answer your queries without making assumptions. If your application that was accepted in principle contained a clause giving the management the right to withdraw the offer anytime till you were formally relieved, the management would be on a stronger wicket. Moreover, by acquiescing with the management action, you have weakened your case substantially.

(ASK! Send in your queries to ask@thehindu.co.in)

S. Murlidharan

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