The Securities and Exchange Board of India (SEBI) is considering a rule under which companies will have to allot bonus and split shares to shareholders within a defined period of time, Moneycontrol has learned from market sources.
The move comes on the back of controversy around the issue of bonus shares by Nykaa to coincide with the end of lock-in period for pre-IPO investors in an attempt to both defer and deter investors from exiting the stock to avoid a crash in the stock price, and another bonus issue by Easemytrip, which resulted in the stock crashing from Rs 382 to Rs 48 on the record date in a reaction to a 3:1 bonus issue and split in face value to Re 1 from Rs 2, only to climb back to Rs 68, surpassing the cum-bonus price of Rs 48 in two days flat.
The ridiculousness of the price movement has caught the attention of the regulator.
Traders and brokers point out that promoters of some companies which issue bonus shares/split the face value of the stock use the ambiguity in the current regulations to rig the stock prices.
At present, companies usually allot the additional shares within 15 days from the announcement of the bonus or stock split, but this varies across companies, and there have been instances where the shares are credited after 15 days. SEBI’s ICDR regulations stipulate the number of days within which companies need to implement the bonus issue from the date of the board meeting, but does not explicitly state the number of days within which the shares need to be allotted to shareholders.
“Where approval of shareholders is not required, the bonus issue should be implemented within 15 days from the date of board meeting announcing bonus issue,” the rule says.
The stock price adjusts for the bonus/split share on the record date, which is the cut-off date set by the company for deciding the shareholders eligible for the bonus share issue.
So, if a stock is quoting at Rs 100, and the company issues a 1:1 bonus or splits the face value by half, the stock price will halve to Rs 50 on the record date, to factor in the additional shares created by the bonus issue/stock split.
Market players say that some promoters, in collusion with operators, rig the stock price during the window between the record date and the date on which the shares are allotted.
“Even if the share price surges, most investors prefer to wait till the additional shares are credited to their accounts before they take profits. That reduces the selling pressure in the system as nobody knows the date on which the shares will be credited,” an HNI trader told Moneycontrol.
“Usually, by the time the shares are credited, the rally fizzles out, and the operators make a quick buck in the process.”
A section of the market feels that since the entire process is electronic, it should not take too long for the shares to be credited. Even for a more complex process like Initial Public Offering (IPO), the timeline from the closing of the issue till the listing of shares has been clearly defined.An e-mail query to SEBI on the issue was not answered at the time of writing this story.