Infosys' board on Friday approved a bonus issue of one equity share for every equity share held by investors. The company also announced a dividend of Rs 30 per share (Read). The two announcements led to a 7 per cent surge in stock prices and sent Infosys to a 52-week high of Rs 3,908 in intraday trade. Infosys has not fixed a record date for the bonus issue yet. (Track stock)
Here's your 10-point cheat-sheet about the bonus issue:
1) Infosys investors will get one share free for every share they hold. As a result, the number of outstanding Infosys shares will also double. Investors get extra shares, but their holding in the company (in terms of percentage) remains the same.
2) The bonus issue will double the company's equity base, but earnings will not double overnight. As a result, earnings per share (EPS) will fall and hence the share prices will correct substantially a day before the record date (called the ex-date) of the bonus issue.
3) Independent analyst Sarvendra Srivastava says it is for the markets to decide what premium it wants to pay for the bonus share. Infosys shares can fall by 30-40 per cent from the current market price on the ex-bonus date, he added.
4) A bonus issue is different from a stock split, in which case the face value of shares fall by half (or in whatever ratio the company decides to split). In case of bonus issue, the face value does not change. So, Infosys shares will continue to have a face value of Rs 5 per share post the bonus.
5) However, a bonus issue increases the liquidity of shares in the market and results in increased investor base.
6) Bonus issues may also result in higher dividends for investors. For instance, if Infosys give Rs 30 per share dividend next year too, investors who hold the stock, will get Rs 60 because of the bonus they got this year.
7) Manoj Goel, director at ARC Financial Services told NDTV that a bonus issue is a sign that the company will increase its profitability substantially to justify issue of additional shares. So the shareholders would be benefited both in terms of high profit and more dividend on total shares, he added.
8) Bonus shares are issued from retained earnings. Infosys had retained earnings of Rs 46,689 crore as on September 30, 2014. Infosys' share capital (Rs 286 crore) will rise.
9) However, some analysts criticized the move. Barclays said Infosys still has US$5.5 billion in cash and we would prefer a comprehensive capital allocation strategy from management.
10) Pramod Gubbi of Ambit told NDTV that a bonus issue is not the way to reward shareholders. The only two ways to reward shareholders are 1) buyback and 2) higher dividend payout, he added (Watch).
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