Reliance Industries went Ex-Bonus on Thursday 26th November 2009 and stock was trading close to 2200 on 25th November and next day opened at close to 1100. I was bombarded with so many questions in emails as well as in the article Reliance Bonus Issue and Dividend.
So let’s take each of them and try to clarify them.
Apart from the queries related to whether I would get bonus shares or not there were quite a few of other interesting questions and I would mention few.
- What is the difference between Bonus and Stock Split?
- Why Reliance Industries Fell by 50%?
- Should the bonus shares just mean I would get extra shares without prices changing from 2200 to 1100 odd?
And so on.
First understand what is Bonus Shares and Stock Split?
- Bonus shares is a very misleading term and there is no bonus when it comes to shareholder’s value since the increase in stock quantity is arithmetically neutralized by the proportionate fall in stock price but it is true that bonus issues are generally bullish for the share price in the near future.
There is no concept of bonus in many developed market and they term the bonus as stock split.
- Stock Split
- Stock split is reduction in denomination (face value) of the shares. Shares in IPO are issued in standard denominations of Rs. 10 but prices of such shares goes up by a margin which can be beyond the scope of retail buyers and so companies tend to decrease the face value by splitting the shares.
In India we still have face value variations but in more developed market all share have face value of unity (Re. 1). Now as there is no concept of face value in more developed market and split (bonus as we term here in India) is used to reduce the price of the shares. What we call a 1:1 bonus in India is actually 2 for 1 split in US.
Say you own a company whose share price is 1000 and face value is 10. Your investor would need to pay a premium of 990 Rs (1000 Rs for a share of 10 face value) which can be a mental block for many small investors. So you decide to split i.e. you split the stock of face value 10 to face value of 1 and the price of your stock is now at 100 Rs and premium is 99 Rs. This is split. You are decreasing the face value or denomination from 10 to 1.
Say again after the split your price went up to 1000. (Yeah I know it’s too bullish 😀 ). Now what? You cannot split the stock anymore. So now instead of doing a split you issue new shares. New shares are given to your investors but that does not mean your company grew by that many times overnight. Before split you had 100 floating shares in the market and now you decide to make it 1000 shares. So the price of each of your shares will fall to 100 from 1000 and now you will have 10 times more shares floated.
Short answer to all such questions is to remember that you cannot double your portfolio overnight which means if any company gives bonus shares that does not mean you would have the shares just added to your portfolio and share would be at the price before the bonus or split.
If you still have any questions post them in comments and I would be more than happy to clarify them.