Recently, all over the news, the headlines were “Patanjali shares crashed by 67%” which created a panic situation among the investors. But did investors actually lose their money? The answer is no, the reason behind this is the bonus issue.
Patanjali Foods declared a 2:1 bonus issue, under which the equity holders will receive 2 equity shares for one share. But what are these bonus shares? Why do companies distribute them, and how do they impact stock prices? Let’s discuss all these points in this blog.
What are Bonus Shares?
A bonus issue of shares is additional shares given to the shareholders by the company, in proportion to their current holdings, with no direct costs to them. They are an alternative to cash dividends, which are issued by the company using its free reserves or retained earnings, particularly in situations where the company may have strong profitability but less liquidity.
The overall investment value of your portfolio doesn’t change; only the number of shares increases.
Why Do Companies Issue Bonus Shares?
Here are the following key reasons for which companies issue bonus shares:
- The company wants to encourage more retail investors to participate in its stocks by lowering the price per share and improving the liquidity of outstanding shares.
- A bonus issue is an alternate way to issue dividends and reward investors.
- It shows that the company is financially stable and is able to generate shareholder value.
How Does It Impact the Stock Price?
Here is how the bonus issue can impact the stock price of a company.
1. Immediate Price Adjustment
The share price is automatically adjusted based on the bonus ratio on the ex-bonus date.
For example, shares of Patanjali dropped from Rs. 1802.25 to Rs. 601.15 post bonus adjustment in the ratio 2:1.
2. Short-term Sentiment
When the company announces bonus issues, the news often triggers reactions in the stock market. In the beginning, the market may respond positively to the announcement of the bonus issue, seeing it as a sign of the company’s good financial health and future prospects. But if the stock is already performing weakly, the sudden rise in the supply of shares will lead to further decline in stock prices.
For example, recently Regis Industries issued a bonus for 1:2. On the ex-bonus date, the stocks crashed to a 52-week low, which indicated that the stock was already under selling pressure.
3. Long-term Impact
The bonus issue does not increase the investment value, but the long-term effect depends on how consistently the company performs post-issue.
For example, Bharat Electronics Ltd (BEL) has been rewarding bonus issues to its shareholders consistently, which is a part of its corporate strategy, due to which the Bharat Electronics share price gets affected.
The company provides a great example of how a bonus issue can lead to positive pricing for the long term. The frequent bonus issue by the company shows the strong management and strong reserves of the company.
Psychological Impact on Investors:
Positive:
- The increased number of shares in investors’ portfolios makes them feel rewarded.
- The reduced share price makes it more affordable for retail investors.
Negative:
- Some investors may panic after a sudden price drop on an ex-date.
- A bonus issue dilutes EPS, which can create worry among investors for the company’s valuation metrics.
In short, bonus shares are more about psychology as the retail investors get attracted to the cheaper prices, which can boost the stock demand in the short run. However, smart investors know the reason behind it and understand that the true value lies in a company’s performance and not in the number of shares they hold.
Conclusion
Bonus shares don’t make you rich overnight, but they play a huge role in shaping market sentiments. They can make a stock look cheaper and attract more investors. While the bonus creates a thrill among the investors, one should always stay focused on strong fundamentals and keep an eye on upcoming bonus shares.
