Nykaa’s 5:1 bonus issue that averted a steep stock price fall is now being criticised as an ‘unfriendly’ move for the company’s existing investors who purchased shares last year during the IPO. Experts are of the view that due to the bonus issue, those holding the shares for the past one year are staring at a higher tax outgo.
Nykaa, which goes by the listed name of FSN E-commerce Ventures, announced the fat bonus issue as it wanted to deter certain large investors from selling shares after their one year mandatory lock-in ended on November 10.
A lock-in period is mandatory for pre-IPO and anchor investors who are allotted shares with bidding in the IPO. It is noticed that these pre-IPO investors sell their holdings immediately when lock-in ends causing the share price to fall sharply.
In India, short term capital gains is taxed at 15 per cent and long term capital gains is taxed at 10 per cent. Since Nykaa announced the bonus issue of 5:1, those holding 100 shares would attract long term capital gains tax (if they sold a year after the IPO) only on those shares. Whereas the remaining 500 shares that came as bonus would attract short term tax, and their value would be counted from zero and not from the IPO price of ₹1,125.
Those who wished to avert a higher tax outgo, would have to wait one more year to sell.
“The intention with which the bonus issue was done shows it was not an investor-friendly move and a bad practice. Market investors have a sharp memory and they do not easily forget such practices,” said Shriram Subramanian, founder and MD, InGovern Research.
But it is not bad for all investors. While promoters and early shareholders will now be able to exit the stock partially with a minimal capital gains tax, Nykaa has created a hurdle in terms of short-term capital gains tax for other shareholders who may want to exit.
However, there is an argument that even though it came at a cost to public shareholders, Nykaa managed to avert a major stock price fall. Nykaa had set November 11 as the record date for bonus shares, which coincided with the end of the lock-in period.
The bonus shares came into the account to public investors on November 14 which is when the share price was adjusted to around ₹210. But if investors sold all the shares on that day, they would be subject to a tax of 15 percent on entire sale amount, experts said.