Stock split momentum yet to catch up with the bull run

Priya Kansara Mumbai | Updated on January 12, 2018


However, bonus issues almost double

Generally when markets peak, stock splits by companies gather momentum. The aim is to make the shares affordable to investors and create more liquidity. However, this time the scenario has been different so far.

Markets have gained 16 per cent till date and closed at a record high on Friday. But the number of companies announcing stock splits between January and May 23 is down marginally to 20 compared to 24 in the same period last year, according to data provided by Capitaline. The number of companies announcing stock splits were 86 in the whole year of 2016, the exact same as in 2015.

“Stock splits are less because liquidity is still flowing in despite markets touching record highs. For a company to announce a stock split, the share price rise has to be 10 times,” said UR Bhat, Managing Director, Dalton Capital Advisors (India) Pvt Ltd.

Among the companies that have announced stock splits in 2017 are Advanced Enzymes, LG Balakrishnan, Deccan Cements, Hindustan Composites, Bharat Electronics, Navin Fluorine International and Sutlej Textiles. These companies’ shares have leaped between 50 and 95 per cent in the last one year.

On the other hand, bonus issues have almost doubled year-on-year to 29 during January and May 23. The number of companies that announced bonus issues in the whole of 2016 was 69 compared to 60 in 2015.

A bonus issue increases the number of outstanding shares of a company and is an indication that the company is confident about its business outlook. But that is not the reason this time in particular. “No tremendous earnings growth is seen at this juncture,” said Jimeet Modi, CEO, SAMCO Securities.

Dividend distribution tax

Companies are preferring bonus issues over stock splits or paying higher dividends to avoid dividend distribution tax. In the Union Budget for financial year 2016-17, the government had levied a 10 per cent charge on income by way of dividend in excess of ₹10 lakh on individuals, Hindu Undivided Family (HUF) or partnership firms. In the 2017-18 Budget, the government had extended the rule to include private trusts.

Among the companies that have announced bonus issues, some have done it in order to reward shareholders, given good business outlook. Such companies include Motherson Sumi Systems, GAIL (India), Container Corporation, NBCC, Petronet LNG and Godrej Consumer Products. Few like Wipro and ICICI Bank seem to have done it in order to boost their share prices or investor sentiments towards their stock.

Analysts have been worried about the asset quality of ICICI Bank and many still believe that its woes are not yet over. Hence, amid a record-breaking show by the market, shares of ICICI Bank have mostly remained an underperformer with a 7 per cent rise in the stock till the bonus announcement. The stock has jumped 17 per cent since the bonus announcement. The same is the case with Wipro. Despite bonus announcement, Wipro’s stock has gained around 9 per cent only as the outlook for the Indian information technology sector is grim.

Whether stock split or bonus, for the investor it is a zero sum game, said a market expert.

Published on May 26, 2017

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