Nykaa’s 5:1 bonus issue, which is receiving a lot of flak from the investor community, was given the go ahead by the Institutional Investor Advisory Services (IiAS) in its note issued on November 2.
In the note, the advisory cited improved liquidity and larger shareholder base as the reasons for a bonus issue. When Moneycontrol reached out to IiAS COO Hetal Dalal, she said, “The timing of the bonus is perhaps a testament to the market savvy of NYKAA’s promoters.”
Nykaa’s MD and CEO Falguni Nayar was in investment banking for decades before starting out with Nykaa, and the bonus issue was seen as an ingenious way to prevent a possible fire sale when the lock-in ended on November 10.
Also read: Lock-in ends, but no fire sale thanks to bonus-issue move by Falguni Nayar
Without the bonus issue, 67 percent of the shares would have been available for trading on expiry of the lock-in. Post the issue, only a sixth of that was made immediately available for trading since the other five was to be transferred later into the demat account. Also lower LTCG (long term capital gains) tax rates meant people stood to gain by holding on to the stock instead of selling it now.
Many investors have been speaking out against the unfairness of saddling shareholders with an unfair tax in the management’s quest to contain stock volatility. Read here to know more about the taxation math.
IiAS’ November 2 note was issued in response to the postal-ballot notice Nykaa had released through the National Stock Exchange (NSE) on October 4. The notice had six items on the agenda, one of which was the approval of the issue of bonus shares.
Against the entry “Approve issuance of bonus shares in the ratio of five shares for every one share held (5:1)”, IiAS had given a “For” recommendation.
Elaborating on the reason, the IiAS note read, “To increase participation of retail shareholders, increase the overall tradable float / activity level, and retail diversification, the company proposes a bonus issue of five equity shares for every one share held (of Re. 1 each). For the issuance of bonus shares, the board has recommended capitalisation of securities premium to the extent of Rs. 2,372.8 million (out of Rs. 14,150.68 million on 31 March 2022). The bonus issue will lower the per share price, and thereby improve liquidity and expand the retail shareholder base. The new equity shares will rank pari passu in all respects with the existing equity shares of the company.”
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While the note correctly points out that a bonus issue can increase liquidity, it does not discuss the tax disadvantage some investors may have to contend with.
Asked about this, Dalal responded that she wasn’t the right person to comment on taxation or tax advantage, and that an audit firm would be able to give better clarity on the matter.
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