Do bonus shares create wealth for Indian Investors ??
- Thread starter TATrader
- Start date
While it maybe true that sometimes there is a fall in investor wealth, capital:Free reserves ratio remains one of the best criteria for selecting shares. There are high net-worth investors who try to play the game of dividends and bonuses alone. It still remains an avenue for augmenting wealth though the future may not always be an extension of the present.
Buying a share for the bonus issue is a "purely speculative" trade. It has nothing to do with gains. People are misled by the term bonus which actually is a stock split.
Example : If you have a share worth Rs 100 on the ex date, after the record date you will get an extra share and since market capitalisation of the company remains the same, the price of the shares will become Rs. 50. Hence 2 X 50 = Rs. 100.
Hence we neither gain nor loose money de to the bonus. The management of the company, the profit, the market, etc. do not change.
However we can gain from the speculation due to bonus (read stock split) announcement if we star early. For research purposes, see the EOD data of Zandu Pahrmaceuticals before and after the bonus issue Ex date.
Example : If you have a share worth Rs 100 on the ex date, after the record date you will get an extra share and since market capitalisation of the company remains the same, the price of the shares will become Rs. 50. Hence 2 X 50 = Rs. 100.
Hence we neither gain nor loose money de to the bonus. The management of the company, the profit, the market, etc. do not change.
However we can gain from the speculation due to bonus (read stock split) announcement if we star early. For research purposes, see the EOD data of Zandu Pahrmaceuticals before and after the bonus issue Ex date.
Dear all
Yes bonuses do create wealth for investors. Only if company can service its expaned equity. But u have to have patience. Dony look for quick gains.
BTW , if u bought 100 Infosys in 1996 ... they would be 8000
share by now .
50000 invested in Infosys in 1995 is > 1.5 crores today
You can live on dividends alone for rest of ur life
Ajax
Yes bonuses do create wealth for investors. Only if company can service its expaned equity. But u have to have patience. Dony look for quick gains.
BTW , if u bought 100 Infosys in 1996 ... they would be 8000
share by now .
50000 invested in Infosys in 1995 is > 1.5 crores today
You can live on dividends alone for rest of ur life
Ajax
Buying a share for the bonus issue is a "purely speculative" trade. It has nothing to do with gains. People are misled by the term bonus which actually is a stock split.
Example : If you have a share worth Rs 100 on the ex date, after the record date you will get an extra share and since market capitalisation of the company remains the same, the price of the shares will become Rs. 50. Hence 2 X 50 = Rs. 100.
Hence we neither gain nor loose money de to the bonus. The management of the company, the profit, the market, etc. do not change.
However we can gain from the speculation due to bonus (read stock split) announcement if we star early. For research purposes, see the EOD data of Zandu Pahrmaceuticals before and after the bonus issue Ex date.
Example : If you have a share worth Rs 100 on the ex date, after the record date you will get an extra share and since market capitalisation of the company remains the same, the price of the shares will become Rs. 50. Hence 2 X 50 = Rs. 100.
Hence we neither gain nor loose money de to the bonus. The management of the company, the profit, the market, etc. do not change.
However we can gain from the speculation due to bonus (read stock split) announcement if we star early. For research purposes, see the EOD data of Zandu Pahrmaceuticals before and after the bonus issue Ex date.
What is a bonus issue?
While investing in shares the motive is not only capital gains but also proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. Thus a shareholder holding two shares, post bonus holds three shares of the company.
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What is a split?
Split is book entry wherein the face value of the share is altered to create more number of shares outstanding without calling for fresh capital or without altering the share capital account. For example if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into two shares of face value Rs.five each and a person holding one share now holds two shares.
What is buy-back?
It is a process by which a company can buy-back its shares from shareholders. A company may buy-back its shares in various ways :
from existing shareholders on a proportionate basis through a tender offer
from open market through book-building process
from the Stock Exchange
from odd lot holders
A company cannot buy-back its shares through negotiated deals, whether on or off the Stock Exchange or through spot transactions or through any private arrangement
What is a Stock Exchange?
A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physical entity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment.
How many Exchanges are there in India?
The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. There are 20 other regional Exchanges, connected via the Inter-Connected Stock Exchange (ICSE). The BSE and NSE allow nationwide trading via their VSAT systems.
What is an Index?
An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements. An Index comprises stocks that have large liquidity and market capitalisation. Each stock is given a weightage in the Index equivalent to its market capitalisation. At the NSE, the capitalisation of NIFTY (fifty selected stocks) is taken as a base capitalisation, with the value set at 1000. Similarly, BSE Sensitive Index or Sensex comprises 30 selected stocks. The Index value compares the day's market capitalisation vis-a-vis base capitalisation and indicates how prices in general have moved over a period of time.
Split and run, or bag a bonus and wait
Laxmikant Gupta
There is much hair-splitting on the relative benefits of a bonus issue vis--vis a share split. An investor with a short-term outlook may benefit by a split, while one willing to wait may prefer a bonus issue.
The news about bonus issues or share splits is normally received positively by shareholders. The same goes for units of mutual funds. Bonus or split in units is normally done when the Net Asset Value (NAV) of the fund is at respectable levels. Similarly, normally, corporates announce bonus or split when the share price goes to a respectable level and the management sees bright prospects for profitability and net worth.
Earlier, Section 94 of the Companies Act allowed issue of bonus shares only. The action of splitting a share was inserted in the Act later on. Issue of bonus shares is governed by specific rules, which insist on adequate reserves; in the balance-sheet, issue of bonus shares is in fact capitalisation of reserves.
With splitting of paid-up capital allowed, corporates started doing it without touching the reserves. This way they could limit the paid-up capital value even while increasing the liquidity of shares in the market, which is always desirable.
The Balance-Sheet perspective
Rewarding by bonus shares means actual capitalisation of reserves. Rewarding by split does not mean anything from the balance-sheet perspective. It only increases the liquidity of stock by reducing the paid-up capital.
If the corporate comes up with further new share issues, by way of private placement, the lower base of the paid-up capital and the higher percentage stake of new investors can be attractive features if the capital has only been split.
If expanded by bonus shares, then, the existing shareholders would already have a higher stake vis--vis further new issue size. Of course, the equity dilution will be lower in that case.
As per Section 55 of the Income-Tax Act, bonus shares entail zero costs while all the purchase cost can be loaded on to the original shares.
A split apportions the cost of acquisition in the split ratio. For bonus shares, the one-year holding requirement for Long-Term Capital Asset (LTCA) eligibility starts from the allotment date of bonus shares.
In the case of split, the one-year eligibility is along with the original form of capital, which is split. In other words, the one-year does not start on the split date but on the date of purchase of original shares.
Which is better?
When does the shareholders benefit by bonus or by split?
For a long-term investor, neither options makes a difference. Relative benefit on either option may get neutralised over time. In case of further shares issue by way of private placement, the equity dilution may be less had shareholders been rewarded with bonus issues.
However, much depends on the pricing and the premium parts of the issue.
An investor with a short-term outlook may benefit by a split rather than a bonus issue. Shares after split are recognised as LTCA if originally these have been held for one year.
However, in the case of bonus issues, the new shares need to be held for one year to become LTCA. There is normally a limit up to which shares can be split.
Also, splitting is not an active decision of balance-sheet restructuring but meant more to show a higher number of shares in trading. Bonus share issues really require adequate reserves as per the relevant Rules.
Periodic bonus announcements show up the real strengths of a company in building up reserves, in its profit model and, of course, in the intention to reward. Further, splitting is more beneficial to short-term stakeholders, while bonus shares are more for long-term stakeholders.
Is it the same for mutual fund investors?
Both bonus shares and split have to do something with the "liquidity" factor. "Liquidity" is relevant only for listed close-ended mutual funds.
The position of an investor in a listed, close-ended mutual fund scheme is the same as that of a corporate investor.
However, for an unlisted open-ended mutual fund, "liquidity" is not an issue at all. What matters more is the "tax efficiency of the investment decision".
An investor owns a fund, a dynamic portfolio and, hence, is not attached to the profitability models or the businesses of underlying securities in the portfolios.
An investor is concerned more with the overall tax-efficiency of his investment planning. Hence, splitting may make more sense for open-ended unlisted mutual fund investors.
Again, for a long-term investor in equity, relative expected benefit from either decision is neutralised over the time.
Stock split versus bonus issue
What is the difference between stock split and bonus issue?
Nitin Chowghule, email
American financial experts tend to be dismissive about bonus issues they are in the nature of stock split, they aver.
According to them, a bonus issue gives only illusory benefits to the shareholders inasmuch as post-bonus, the worth of the shares for the shareholders remains where they were ante-bonus what with the intrinsic value of the shares of the company suffering a dilution a 1:1 bonus spells halving of the intrinsic worth, what with the pie net worth now being shared by twice the number of shares and the shareholders being compensated by the additional shares. Be that as it may.
There is, however, a vital difference between the two. In stock split, the paid-up capital of the company remains the same.
To wit, if a company has issued Rs 10 shares aggregating to Rs 100 crore, a stock split resulting in the face value being reduced to Re 1 per share is not going to increase the paid-up share capital of the company; only the number of shares would have increased ten-fold.
But a 1:1 bonus issue has the effect of doubling the paid-up capital of a company. Like bonus, stock split also leaves the net worth of the company where it was. Which perhaps is why the Americans are not unduly enamoured of bonus issues.
But the Indian experience has been that bonus issue does send out a positive signal so much so that the ex-bonus price does not get exactly halved assuming a 1:1 bonus.
Flat from father to son
I live in my father's flat, which was constructed in 1972. In the society records I have been subsequently made the co-member, but the original registration is in my father's name.
If the flat is now transferred to my name (say as a gift), will its value be considered as taxable in my name? If so, what will be its valuation?
Will it be the current market rate or the depreciated value (which might be negligible)?
G. Sanjay, email
Till such time you are a minor, the income attributable to your share of the property would also be added to the income of your father who is deemed to be its owner notwithstanding the gift.
But once you attain majority, the income from the property attributable to your share would be taxed in your hands.
This in any case is the legislative intent which, of course, is not backed by the language of Section 27, which gives the wrong impression that once gifted to a minor the parent is deemed to be the owner for all times to come irrespective of whether the minor has attained majority or not.
The value of the property itself is not taxable as income because Section 56 targets only money gifts in the first place, and then hastens to exempt gift from lineal ascendants amongst others from its purview.
TDS and disallowance
Is an expenditure disallowed even if the interest for non-remittance of TDS is not paid, or is it disallowed only for non-payment of TDS?
Hari Babu, email
The disallowance referred to in Section 40(a) is with reference to default in deduction or deposit of TDS. Non-payment of interest for such default is not visited with disallowance under this section.
Shares as gift
What happens to gifts of shares made to one's friends and relatives? Are they taxable in the hands of the donor or in the hands of the donee?
Nitin Bafna, email
Mercifully in the hands of neither because donors have been spared of tax liability with the abolition of gift tax and donees have been brought under the pincer of income-tax only with regard to monetary gifts.
Bonus Stocks
Companies do not generally distribute their entire profits to the stockholders as dividends. A fairly large part of the profit is retained and added on to what is commonly called the reserves of the company. As the name indicates, reserves are back up funds which a company keeps for meeting unforeseen increases in expenditure, and for financing its future expansion or diversification programmes. Over the years, most profit making companies build up large reserves. There is also a sizeable increase in their assets, sales and volume of business. When such growth takes place, companies often find that their equity capital is too small compared to the expanded size of their business operations. It is not advantageous for companies to operate a continuously expanding business on a narrow capital base. Therefore, in order to expand their equity capital they capitalize a part of their reserves by issuing bonus stocks to their stockholders. Bonus stocks, as the name suggests, are issued free to existing stockholders in proportion to the number of stocks held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus stocks is transferred from the reserves to the equity capital in the company's books of accounts. The issue of bonus stocks enlarges a stockholder's stockholding without any dilution in his proportionate ownership of the company.
The issue of bonus stocks almost always leads to a fall in the market price of a stock. This does not, however, adversely affect the stockholder because such a fall in the market price is more than offset by the increase in the size of his stockholding.
To illustrate how this happens, let us assume that you own 100 stocks in XYZ Ltd. when it issues bonus stocks in the ratio of 1: 1. Let us also assume the market price to be $1 per stock prior to the bonus issue. With the issue of bonus stocks, your stockholding doubles to 200 stocks. At the same time, the market price of the stocks would probably fall to $0.5 per stock, Even though the price has fallen, you do not lose because the value of your stockholding remains at $100. The fall in price from $1 to $0.5 per stock is fully compensated by the increase in your stockholding from 100 to 200 stocks. Actually, stock prices generally do not fall in the same proportion in which bonus stocks, are issued. In this case, the ex bonus price of XYZ stocks would probably fall to around $0.53 per stock.
Companies usually continue to pay the same rate of dividend after the issue of bonus stocks as they were paying prior to the issue. This benefits the stockholder because he gets the same rate of dividend on a larger stockholding. A company will not normally issue bonus stocks unless it is confident that its future growth prospects justify an expansion in its equity capital Therefore, the expectation of a bonus issue by any company normally creates a climate of optimism and cheer in the stock markets and usually results in a rise in the price of a company's stocks just before or upon the announcement by it of a bonus issue.
Benefits of issue of bonus shares
Bonus shares offer big tax benefits
Nikhil Lohade & Nimesh Shah in Mumbai | April 15, 2004 10:10 IST
With big technology and pharma companies announcing bonus share issues, it's time to reveal a secret: Bonus shares can be effectively used a tax saving tool.
How is this done? Simply, the loss incurred after selling a stock once it turns ex-bonus can be used to set off against short-term capital gains.
Bimal Doshi, Mumbai-based chartered accountant and management consultant, explains how shares of the company which announces bonus shares can be effectively used as a tool of tax planning.
As per the Income Tax Act, the cost of acquisition of bonus shares is taken at NIL, while cost of original shares remains at the cost at which there were purchased i.e. cum-bonus price. How effectively tax can be saved is explained by the following example.
Suppose short-term capital gain realised by an individual is Rs 200,000. An individual also has other income amounting to Rs 1,50,000 on which deduction under Section 80l is not available.
Further assume that you have fully invested for all tax planning investments like 10,000 for 80CCC, Rs 1.00.000 for section 88, etc.
In such case tax liability works out as follows:
Suppose, the individual intends to by a stock which he will hold for a longer period. He may look for a scrip in which bonus is issued.
Take, for example, Infosys, which announced a bonus in the ratio of 3 shares for one held. If the investor buys Infosys shares, say at a cum-bonus price of Rs 5,400 per share.
The ex-price of the share will work out to Rs 1,350 share. The investor can sell the original shares purchased at the ex-bonus price and incur taxable short-term capital loss, which he can set-off against his taxable STG.
Now suppose the investor buys 50 shares of Infosys at cum-bonus price of Rs 5,400 per share. He will receive 150 bonus shares on the original 50 shares at NIL cost.
The ex-bonus price will work out to Rs 1,350 per share. If the investor sells original 50 shares which he had purchased at Rs 5,400 per share at Rs 1,350 per share, thereby incurring total loss of Rs 2,02,500. Thus his tax liability shall work out as follows:
Thus, effective tax outflow can be reduced to the extent of Rs 59,000. The investor will have 150 shares of Infosys at cost NIL value. He may hold the same for a period of one year and take advantage of the long-term capital gain too.
Does a stock split reduce tax?
A laymans guide to how and when a stock split is taxed in the hands of a shareholder.
Narayan Varma and Gautam Nayak page 1 of 1
Till a year ago, corporate action relating to existing shares was relegated to mainly dividends, rights issues and bonus issues. In the past year, however, splitting of shares has become common. But what exactly is splitting of shares, and how does this differ from a bonus issue? Lets take a look at the taxation of gains on the sale of shares in either case.
What is a stock split? In India, under the law, the shares of a company must each have what is known as the face value or nominal value. This is the theoretical value of each share, which is accounted for by the company in its share capital when the shares are issued. The face value is initially decided upon at the time when the company is first incorporated, and can be amended by the company at a subsequent date.
Earlier, the face value of the shares of most listed companies was Rs 10 per share on account of the standard face value that was mandatorily laid down by the regulatory authorities a few years ago. A year ago, this restriction on the face value was done away with, and companies have thereafter been free to fix the face value of their shares as they wanted.
Many existing listed companies who found their high share prices a deterrent for prospective investors, decided to reduce the face value of their shares from Rs 10 a share to Re 1 a share (like Zee Telefilms and Hindustan Lever have done), Rs 2 a share (as in the case of Wipro and Satyam Computers) and Rs 5 a share (as in the case of Infosys). The result of such a stock split was that a shareholder with one share of Rs 10 was instead given 10 shares of Re 1 each, or five shares of Rs 2 each, or two shares of Rs 5 each.
How does a stock split differ from a bonus issue? What a stock split does is divide each of the existing shares into a number of shares of a lower value. Unlike in the case of a bonus issue, the existing shares are converted into new shares of a lower value. In a bonus issue, additional new shares are allotted to the shareholder; the existing shares continue as they are, and there is no change in their face value.
The difference between a stock split and a bonus issue can also be understood by taking a look at the accounting treatment given by companies to these two types of corporate actions. In a stock split, the company does not pass any accounting entry at all, since the total value of its capital remains the same, and only the description of the capital changes to show a larger number of shares, each of a lesser value.
In the case of a bonus issue, the company transfers the value of the bonus shares being issued from its reserves or share premium account to its share capital account, and therefore the share capital of the company increases by the value of the bonus issue. Given these differences, let us consider how the tax treatment differs in the case of a stock split and a bonus issue in the hands of a shareholder. Of course, both a bonus issue and a stock split are not regarded as a transfer or as giving rise to any income at the time of the bonus issue or the stock split. Income in either case would arise as a capital gain only on the sale of shares.
Tax treatment of a bonus issue... In this case, the cost of the bonus shares is deemed nil, even as the cost of the original shares (in respect of which the bonus shares were received) remains unchanged at the original cost. The bonus shares are regarded as new capital assets that come into existence from the date of their issue. Therefore, to determine whether the bonus shares are long-term capital assets or to find out their cost after indexation, the period of holding of the shares is computed with effect from the date of the bonus issue, and not from the date of acquisition of the original shares.
...and a stock split. Since a stock split is a division of the existing shares into smaller lots, the cost of each split share is computed in the same proportion of the cost of the original shares as the face value of the split share bears to the face value of the original share. Take for example the case of a split in Zee Telefilms shares. Lets say you bought the shares of the company at Rs 1,200 per share at a face value of Rs 10 each. After the stock split which reduced the face value from Rs 10 to Re 1, the cost of each of the 10 split shares of Re 1 each would be taken as one-tenth of the original cost of one share of Rs 10 (that is, the original cost of Rs 1,200). This gives you a cost of Rs 120 per split share (computed as one-tenth of Rs 1,200) of a face value of Re 1.
Question mark over date of acquisition. The Income Tax Act has a specific provision that relates to the manner in which you can compute the cost of split shares. However, when it comes to the question of determining the date of acquisition of split shares, there is no express provision to be found in the Income Tax Act. The question, therefore, arises as to whether you should adopt the date of acquisition of the original shares or take the date of allotment of the split shares into account while computing your capital gains and while indexing the cost of acquisition.
Going by the very concept of a stock split, it does not change your rights as a shareholder in any way; you hold the same capital asset, but in a modified form. Therefore, logically, the date of acquisition should be taken as the date of acquisition of the original shares. This view is supported by the fact that generally, under the Income Tax Act, where a specific transaction (like a gift of assets) is not regarded as a transfer, then for the purpose of computing capital gains, both the cost and the date of acquisition are taken as the same cost and the date of acquisition as for the previous owner or the previous assets, as the case may be.
Therefore, a stock split does not really offer any tax advantages to an existing shareholder. This is unlike in the case of bonus shares, where one can gain by deciding whether to sell the original shares or the bonus shares, depending upon the capital gain or loss desired (See Buy Cum-Bonus, Sell Ex-Bonus, June 16, 1999).
But then, a stock split does benefit a shareholder commercially in much the same way as a bonus issue. A shareholder can buy and sell shares in smaller lots as per her convenience. For instance, a Zee share may have been an expensive buy at Rs 14,000 (face value Rs 10), and an existing shareholder would have been able to sell shares only in multiples of Rs 14,000. However, since the stock split has reduced the share price to Rs 1,400, a shareholder who wants to sell or an intending buyer can transact for a value ranging from Rs 1,400 to Rs 12,600 as she desires, in multiples of Rs 1,400, giving her greater flexibility. Therefore, while a stock split and a bonus issue may have similar commercial benefits for a shareholder, the tax treatment is totally different.
While investing in shares the motive is not only capital gains but also proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extra share. Thus a shareholder holding two shares, post bonus holds three shares of the company.
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What is a split?
Split is book entry wherein the face value of the share is altered to create more number of shares outstanding without calling for fresh capital or without altering the share capital account. For example if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into two shares of face value Rs.five each and a person holding one share now holds two shares.
What is buy-back?
It is a process by which a company can buy-back its shares from shareholders. A company may buy-back its shares in various ways :
from existing shareholders on a proportionate basis through a tender offer
from open market through book-building process
from the Stock Exchange
from odd lot holders
A company cannot buy-back its shares through negotiated deals, whether on or off the Stock Exchange or through spot transactions or through any private arrangement
What is a Stock Exchange?
A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physical entity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment.
How many Exchanges are there in India?
The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. There are 20 other regional Exchanges, connected via the Inter-Connected Stock Exchange (ICSE). The BSE and NSE allow nationwide trading via their VSAT systems.
What is an Index?
An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements. An Index comprises stocks that have large liquidity and market capitalisation. Each stock is given a weightage in the Index equivalent to its market capitalisation. At the NSE, the capitalisation of NIFTY (fifty selected stocks) is taken as a base capitalisation, with the value set at 1000. Similarly, BSE Sensitive Index or Sensex comprises 30 selected stocks. The Index value compares the day's market capitalisation vis-a-vis base capitalisation and indicates how prices in general have moved over a period of time.
Split and run, or bag a bonus and wait
Laxmikant Gupta
There is much hair-splitting on the relative benefits of a bonus issue vis--vis a share split. An investor with a short-term outlook may benefit by a split, while one willing to wait may prefer a bonus issue.
The news about bonus issues or share splits is normally received positively by shareholders. The same goes for units of mutual funds. Bonus or split in units is normally done when the Net Asset Value (NAV) of the fund is at respectable levels. Similarly, normally, corporates announce bonus or split when the share price goes to a respectable level and the management sees bright prospects for profitability and net worth.
Earlier, Section 94 of the Companies Act allowed issue of bonus shares only. The action of splitting a share was inserted in the Act later on. Issue of bonus shares is governed by specific rules, which insist on adequate reserves; in the balance-sheet, issue of bonus shares is in fact capitalisation of reserves.
With splitting of paid-up capital allowed, corporates started doing it without touching the reserves. This way they could limit the paid-up capital value even while increasing the liquidity of shares in the market, which is always desirable.
The Balance-Sheet perspective
Rewarding by bonus shares means actual capitalisation of reserves. Rewarding by split does not mean anything from the balance-sheet perspective. It only increases the liquidity of stock by reducing the paid-up capital.
If the corporate comes up with further new share issues, by way of private placement, the lower base of the paid-up capital and the higher percentage stake of new investors can be attractive features if the capital has only been split.
If expanded by bonus shares, then, the existing shareholders would already have a higher stake vis--vis further new issue size. Of course, the equity dilution will be lower in that case.
As per Section 55 of the Income-Tax Act, bonus shares entail zero costs while all the purchase cost can be loaded on to the original shares.
A split apportions the cost of acquisition in the split ratio. For bonus shares, the one-year holding requirement for Long-Term Capital Asset (LTCA) eligibility starts from the allotment date of bonus shares.
In the case of split, the one-year eligibility is along with the original form of capital, which is split. In other words, the one-year does not start on the split date but on the date of purchase of original shares.
Which is better?
When does the shareholders benefit by bonus or by split?
For a long-term investor, neither options makes a difference. Relative benefit on either option may get neutralised over time. In case of further shares issue by way of private placement, the equity dilution may be less had shareholders been rewarded with bonus issues.
However, much depends on the pricing and the premium parts of the issue.
An investor with a short-term outlook may benefit by a split rather than a bonus issue. Shares after split are recognised as LTCA if originally these have been held for one year.
However, in the case of bonus issues, the new shares need to be held for one year to become LTCA. There is normally a limit up to which shares can be split.
Also, splitting is not an active decision of balance-sheet restructuring but meant more to show a higher number of shares in trading. Bonus share issues really require adequate reserves as per the relevant Rules.
Periodic bonus announcements show up the real strengths of a company in building up reserves, in its profit model and, of course, in the intention to reward. Further, splitting is more beneficial to short-term stakeholders, while bonus shares are more for long-term stakeholders.
Is it the same for mutual fund investors?
Both bonus shares and split have to do something with the "liquidity" factor. "Liquidity" is relevant only for listed close-ended mutual funds.
The position of an investor in a listed, close-ended mutual fund scheme is the same as that of a corporate investor.
However, for an unlisted open-ended mutual fund, "liquidity" is not an issue at all. What matters more is the "tax efficiency of the investment decision".
An investor owns a fund, a dynamic portfolio and, hence, is not attached to the profitability models or the businesses of underlying securities in the portfolios.
An investor is concerned more with the overall tax-efficiency of his investment planning. Hence, splitting may make more sense for open-ended unlisted mutual fund investors.
Again, for a long-term investor in equity, relative expected benefit from either decision is neutralised over the time.
Stock split versus bonus issue
What is the difference between stock split and bonus issue?
Nitin Chowghule, email
American financial experts tend to be dismissive about bonus issues they are in the nature of stock split, they aver.
According to them, a bonus issue gives only illusory benefits to the shareholders inasmuch as post-bonus, the worth of the shares for the shareholders remains where they were ante-bonus what with the intrinsic value of the shares of the company suffering a dilution a 1:1 bonus spells halving of the intrinsic worth, what with the pie net worth now being shared by twice the number of shares and the shareholders being compensated by the additional shares. Be that as it may.
There is, however, a vital difference between the two. In stock split, the paid-up capital of the company remains the same.
To wit, if a company has issued Rs 10 shares aggregating to Rs 100 crore, a stock split resulting in the face value being reduced to Re 1 per share is not going to increase the paid-up share capital of the company; only the number of shares would have increased ten-fold.
But a 1:1 bonus issue has the effect of doubling the paid-up capital of a company. Like bonus, stock split also leaves the net worth of the company where it was. Which perhaps is why the Americans are not unduly enamoured of bonus issues.
But the Indian experience has been that bonus issue does send out a positive signal so much so that the ex-bonus price does not get exactly halved assuming a 1:1 bonus.
Flat from father to son
I live in my father's flat, which was constructed in 1972. In the society records I have been subsequently made the co-member, but the original registration is in my father's name.
If the flat is now transferred to my name (say as a gift), will its value be considered as taxable in my name? If so, what will be its valuation?
Will it be the current market rate or the depreciated value (which might be negligible)?
G. Sanjay, email
Till such time you are a minor, the income attributable to your share of the property would also be added to the income of your father who is deemed to be its owner notwithstanding the gift.
But once you attain majority, the income from the property attributable to your share would be taxed in your hands.
This in any case is the legislative intent which, of course, is not backed by the language of Section 27, which gives the wrong impression that once gifted to a minor the parent is deemed to be the owner for all times to come irrespective of whether the minor has attained majority or not.
The value of the property itself is not taxable as income because Section 56 targets only money gifts in the first place, and then hastens to exempt gift from lineal ascendants amongst others from its purview.
TDS and disallowance
Is an expenditure disallowed even if the interest for non-remittance of TDS is not paid, or is it disallowed only for non-payment of TDS?
Hari Babu, email
The disallowance referred to in Section 40(a) is with reference to default in deduction or deposit of TDS. Non-payment of interest for such default is not visited with disallowance under this section.
Shares as gift
What happens to gifts of shares made to one's friends and relatives? Are they taxable in the hands of the donor or in the hands of the donee?
Nitin Bafna, email
Mercifully in the hands of neither because donors have been spared of tax liability with the abolition of gift tax and donees have been brought under the pincer of income-tax only with regard to monetary gifts.
Bonus Stocks
Companies do not generally distribute their entire profits to the stockholders as dividends. A fairly large part of the profit is retained and added on to what is commonly called the reserves of the company. As the name indicates, reserves are back up funds which a company keeps for meeting unforeseen increases in expenditure, and for financing its future expansion or diversification programmes. Over the years, most profit making companies build up large reserves. There is also a sizeable increase in their assets, sales and volume of business. When such growth takes place, companies often find that their equity capital is too small compared to the expanded size of their business operations. It is not advantageous for companies to operate a continuously expanding business on a narrow capital base. Therefore, in order to expand their equity capital they capitalize a part of their reserves by issuing bonus stocks to their stockholders. Bonus stocks, as the name suggests, are issued free to existing stockholders in proportion to the number of stocks held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus stocks is transferred from the reserves to the equity capital in the company's books of accounts. The issue of bonus stocks enlarges a stockholder's stockholding without any dilution in his proportionate ownership of the company.
The issue of bonus stocks almost always leads to a fall in the market price of a stock. This does not, however, adversely affect the stockholder because such a fall in the market price is more than offset by the increase in the size of his stockholding.
To illustrate how this happens, let us assume that you own 100 stocks in XYZ Ltd. when it issues bonus stocks in the ratio of 1: 1. Let us also assume the market price to be $1 per stock prior to the bonus issue. With the issue of bonus stocks, your stockholding doubles to 200 stocks. At the same time, the market price of the stocks would probably fall to $0.5 per stock, Even though the price has fallen, you do not lose because the value of your stockholding remains at $100. The fall in price from $1 to $0.5 per stock is fully compensated by the increase in your stockholding from 100 to 200 stocks. Actually, stock prices generally do not fall in the same proportion in which bonus stocks, are issued. In this case, the ex bonus price of XYZ stocks would probably fall to around $0.53 per stock.
Companies usually continue to pay the same rate of dividend after the issue of bonus stocks as they were paying prior to the issue. This benefits the stockholder because he gets the same rate of dividend on a larger stockholding. A company will not normally issue bonus stocks unless it is confident that its future growth prospects justify an expansion in its equity capital Therefore, the expectation of a bonus issue by any company normally creates a climate of optimism and cheer in the stock markets and usually results in a rise in the price of a company's stocks just before or upon the announcement by it of a bonus issue.
Benefits of issue of bonus shares
Bonus shares offer big tax benefits
Nikhil Lohade & Nimesh Shah in Mumbai | April 15, 2004 10:10 IST
With big technology and pharma companies announcing bonus share issues, it's time to reveal a secret: Bonus shares can be effectively used a tax saving tool.
How is this done? Simply, the loss incurred after selling a stock once it turns ex-bonus can be used to set off against short-term capital gains.
Bimal Doshi, Mumbai-based chartered accountant and management consultant, explains how shares of the company which announces bonus shares can be effectively used as a tool of tax planning.
As per the Income Tax Act, the cost of acquisition of bonus shares is taken at NIL, while cost of original shares remains at the cost at which there were purchased i.e. cum-bonus price. How effectively tax can be saved is explained by the following example.
Suppose short-term capital gain realised by an individual is Rs 200,000. An individual also has other income amounting to Rs 1,50,000 on which deduction under Section 80l is not available.
Further assume that you have fully invested for all tax planning investments like 10,000 for 80CCC, Rs 1.00.000 for section 88, etc.
In such case tax liability works out as follows:
Suppose, the individual intends to by a stock which he will hold for a longer period. He may look for a scrip in which bonus is issued.
Take, for example, Infosys, which announced a bonus in the ratio of 3 shares for one held. If the investor buys Infosys shares, say at a cum-bonus price of Rs 5,400 per share.
The ex-price of the share will work out to Rs 1,350 share. The investor can sell the original shares purchased at the ex-bonus price and incur taxable short-term capital loss, which he can set-off against his taxable STG.
Now suppose the investor buys 50 shares of Infosys at cum-bonus price of Rs 5,400 per share. He will receive 150 bonus shares on the original 50 shares at NIL cost.
The ex-bonus price will work out to Rs 1,350 per share. If the investor sells original 50 shares which he had purchased at Rs 5,400 per share at Rs 1,350 per share, thereby incurring total loss of Rs 2,02,500. Thus his tax liability shall work out as follows:
Thus, effective tax outflow can be reduced to the extent of Rs 59,000. The investor will have 150 shares of Infosys at cost NIL value. He may hold the same for a period of one year and take advantage of the long-term capital gain too.
Does a stock split reduce tax?
A laymans guide to how and when a stock split is taxed in the hands of a shareholder.
Narayan Varma and Gautam Nayak page 1 of 1
Till a year ago, corporate action relating to existing shares was relegated to mainly dividends, rights issues and bonus issues. In the past year, however, splitting of shares has become common. But what exactly is splitting of shares, and how does this differ from a bonus issue? Lets take a look at the taxation of gains on the sale of shares in either case.
What is a stock split? In India, under the law, the shares of a company must each have what is known as the face value or nominal value. This is the theoretical value of each share, which is accounted for by the company in its share capital when the shares are issued. The face value is initially decided upon at the time when the company is first incorporated, and can be amended by the company at a subsequent date.
Earlier, the face value of the shares of most listed companies was Rs 10 per share on account of the standard face value that was mandatorily laid down by the regulatory authorities a few years ago. A year ago, this restriction on the face value was done away with, and companies have thereafter been free to fix the face value of their shares as they wanted.
Many existing listed companies who found their high share prices a deterrent for prospective investors, decided to reduce the face value of their shares from Rs 10 a share to Re 1 a share (like Zee Telefilms and Hindustan Lever have done), Rs 2 a share (as in the case of Wipro and Satyam Computers) and Rs 5 a share (as in the case of Infosys). The result of such a stock split was that a shareholder with one share of Rs 10 was instead given 10 shares of Re 1 each, or five shares of Rs 2 each, or two shares of Rs 5 each.
How does a stock split differ from a bonus issue? What a stock split does is divide each of the existing shares into a number of shares of a lower value. Unlike in the case of a bonus issue, the existing shares are converted into new shares of a lower value. In a bonus issue, additional new shares are allotted to the shareholder; the existing shares continue as they are, and there is no change in their face value.
The difference between a stock split and a bonus issue can also be understood by taking a look at the accounting treatment given by companies to these two types of corporate actions. In a stock split, the company does not pass any accounting entry at all, since the total value of its capital remains the same, and only the description of the capital changes to show a larger number of shares, each of a lesser value.
In the case of a bonus issue, the company transfers the value of the bonus shares being issued from its reserves or share premium account to its share capital account, and therefore the share capital of the company increases by the value of the bonus issue. Given these differences, let us consider how the tax treatment differs in the case of a stock split and a bonus issue in the hands of a shareholder. Of course, both a bonus issue and a stock split are not regarded as a transfer or as giving rise to any income at the time of the bonus issue or the stock split. Income in either case would arise as a capital gain only on the sale of shares.
Tax treatment of a bonus issue... In this case, the cost of the bonus shares is deemed nil, even as the cost of the original shares (in respect of which the bonus shares were received) remains unchanged at the original cost. The bonus shares are regarded as new capital assets that come into existence from the date of their issue. Therefore, to determine whether the bonus shares are long-term capital assets or to find out their cost after indexation, the period of holding of the shares is computed with effect from the date of the bonus issue, and not from the date of acquisition of the original shares.
...and a stock split. Since a stock split is a division of the existing shares into smaller lots, the cost of each split share is computed in the same proportion of the cost of the original shares as the face value of the split share bears to the face value of the original share. Take for example the case of a split in Zee Telefilms shares. Lets say you bought the shares of the company at Rs 1,200 per share at a face value of Rs 10 each. After the stock split which reduced the face value from Rs 10 to Re 1, the cost of each of the 10 split shares of Re 1 each would be taken as one-tenth of the original cost of one share of Rs 10 (that is, the original cost of Rs 1,200). This gives you a cost of Rs 120 per split share (computed as one-tenth of Rs 1,200) of a face value of Re 1.
Question mark over date of acquisition. The Income Tax Act has a specific provision that relates to the manner in which you can compute the cost of split shares. However, when it comes to the question of determining the date of acquisition of split shares, there is no express provision to be found in the Income Tax Act. The question, therefore, arises as to whether you should adopt the date of acquisition of the original shares or take the date of allotment of the split shares into account while computing your capital gains and while indexing the cost of acquisition.
Going by the very concept of a stock split, it does not change your rights as a shareholder in any way; you hold the same capital asset, but in a modified form. Therefore, logically, the date of acquisition should be taken as the date of acquisition of the original shares. This view is supported by the fact that generally, under the Income Tax Act, where a specific transaction (like a gift of assets) is not regarded as a transfer, then for the purpose of computing capital gains, both the cost and the date of acquisition are taken as the same cost and the date of acquisition as for the previous owner or the previous assets, as the case may be.
Therefore, a stock split does not really offer any tax advantages to an existing shareholder. This is unlike in the case of bonus shares, where one can gain by deciding whether to sell the original shares or the bonus shares, depending upon the capital gain or loss desired (See Buy Cum-Bonus, Sell Ex-Bonus, June 16, 1999).
But then, a stock split does benefit a shareholder commercially in much the same way as a bonus issue. A shareholder can buy and sell shares in smaller lots as per her convenience. For instance, a Zee share may have been an expensive buy at Rs 14,000 (face value Rs 10), and an existing shareholder would have been able to sell shares only in multiples of Rs 14,000. However, since the stock split has reduced the share price to Rs 1,400, a shareholder who wants to sell or an intending buyer can transact for a value ranging from Rs 1,400 to Rs 12,600 as she desires, in multiples of Rs 1,400, giving her greater flexibility. Therefore, while a stock split and a bonus issue may have similar commercial benefits for a shareholder, the tax treatment is totally different.
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