Thread by @may27capital

There is a lot of buzz around the likely issue of bonus shares by #IEX . Except for offering tax efficient dividend to existing shareholders, issue of bonus shares add little to no value to the investors who want to make a fresh buy. Here's why. A short thread 🧵!

Issue of bonus shares can be considered as a tax efficient way of rewarding shareholders by paying dividend in the form of bonus stock. The bonus shares are issued from the reserves of the company. They are issued in the ratios of 1:1, 2:1 etc.

2/n

The CMP of #IEX is 798.45. Imagine you are an existing shareholder who holds 10 shares of IEX. The value of your holding is 7,984 Rs approx. Let us assume that the board decides to issue bonus shares in the ratio of 1:1.

3/n

After bonus issue you will have 20 shares of #IEX in your portfolio. But the stock price is adjusted as per the ratio of bonus and new CMP becomes half of the price before issue of bonus i.e., 399.25. So effectively the face value of the share remains unchanged.

4/n

So, it doesn't make sense for an investor to make a fresh buy into #IEX just because it is issuing bonus shares. Only changes that happen post bonus issue are the outstanding equity increases and earnings per share decreases.

5/n

Post the drop in share price due to bonus issue, quality of investors maybe decreased as more retail investors are likely to enter. It is likely that there will be more churn as the shares keep exchanging between weaker hands increasing volatility.

6/n

Existing shareholders of #IEX do have an advantage of receiving dividends in the form of bonus share. If the dividends were paid directly, investors would end up paying tax on dividends received from IEX. But with bonus shares they only pay taxes when they sell.

7/n

So investors should buy #IEX if they believe in the long term prospects of the company. But we should not buy them because there is issue of bonus shares and sell them later paying a 15% STCG tax.

8/n

Hope the short thread has helped to clear the air around the value addition of buying a stock before bonus issue. For more such insights on investing, please consider retweeting and following us. Thank you! Here's the top of the tweet.

https://twitter.com/may27capital/status/1450114990585696260