Comments on Capital Mind: Reliance 1:1 Bonus and the Brouhaha

Gharoa Adda: thanks - that's useful. Didn't know b...

2009-10-31T02:48:02.198+05:30

Gharoa Adda: thanks - that's useful. Didn't know bonus stripping was not applicable for stocks, so there is a use for it, I guess!

Vikas: the ex-date has not yet been announced. Meaning, the bonus has not yet been given (only said they will do it, don't know when). On the "ex-date" the share will halve.

But the way it's going it seems to want to go down to half of it's high anyway!

I agree with the article completely that the share...

2009-10-29T16:42:54.529+05:30

I agree with the article completely that the share price will reduce to half. However, when I check the closing stock price from 1st Oct thru 20th Oct this is not case. RIL made the announcement on 7-Oct. The question is why the price has not reduced to half?

Hi Deepak, Refer the blog you wrote regarding Bo...

2009-10-23T03:37:35.790+05:30

Hi Deepak,

Refer the blog you wrote regarding Bonus Stripping. I found the following :

What you propose to do is typically known as bonus stripping. You may note that there are some restrictions in Section 94(8) to prevent tax avoidance through bonus stripping.

(a) any person buys or acquires any units within a period of three months prior to the record date;

(b) such person is allotted additional units without any payment on the basis of holding of such units on such date;

(c) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),

then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.]

definition of "units" doesn't include shares.

(b) “unit” means unit of a mutual fund specified under clause (23D) of section 10 or of the Unit Trust of India;

This Section, however, would only apply to units of mutual funds and would not apply to transactions in shares. The transaction as stated by you, therefore, appears to be quite legitimate with no provision prohibiting the same.

The capital loss that you book on the sale of the original shares, which is a short-term capital loss would be available for adjustment against short-term capital gain on sale of property in the same year.

Bingo: agreed, for a very small investor perhaps. ...

2009-10-14T23:39:05.143+05:30

Bingo: agreed, for a very small investor perhaps. At 750 bucks a month the commissions will kill him!

Venkat: Yes of course - a 10:1 meaning 10 shares for every 1. Mistake,shall correct, thanks for noting.

Sachin: Market price - it comes by half by the market itself, on the ex-date. You can check every single share also - in fact even the fat-finger price limits are set on that day according to the half price (plus all strike prices of options are halved while lot sizes are doubled etc.)

5:1 is better only because teh stock becomes moer affordable, which helps small investors in certain stocks where liquidity at the retail level is a problem.

Hi Deepak. I'm a new follower of your blog the la...

2009-10-14T17:39:54.923+05:30

Hi Deepak.

I'm a new follower of your blog the last few months and I really appreciate your articles!

This one was very nice... and it also led me to another nice (older) article on "Of Shares, IPOs and Stock Markets".

1) I have a query on what you said here:
'The share price will come down by half, and the number of shares will double, on the announced "ex-date"'

Will the face value of the share become half or are you talking about market price? If you meant market price, the price being driven by market, how can you say that it will halve?

2) And also, how will a 1:5 bonus be better for a current share holder than a 1:1 if the market price would then be 1/5th?

Thanks

When you said "For Reliance this is a HUGE amount ...

2009-10-13T11:53:07.250+05:30

When you said "For Reliance this is a HUGE amount - since they have been immensely profitable over the years. They can even give a 1:10 bonus and still have reserves left over", I think you meant to say 10:1 bonus.

For investors, especially small investors, bonus d...

2009-10-11T17:03:45.962+05:30

For investors, especially small investors, bonus does matter a lot. The price of a RIL share had crossed Rs. 2000. Suppose someone wants to price-average into a few stocks. His monthly exposure to RIL is Rs. 750. Since he can't buy a fraction of a share, he will have to buy once every 3 months. This reduces the granularity of price-averaging and makes it riskier for the investor.