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Impact of Bonus Issue on Market Price

Research Extract
Bonus shares, as the name suggests, are issued free to existing stockholders in proportion to the number of stocks held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus shares is transferred from the reserves to the equity capital in the companys books of accounts
Companies issue shares in lieu of consideration. The consideration may be either in the form of cash or kind. Bonus shares are issued to the existing shareholders without payment of any consideration, either in cash or kind. Bonus shares are issued by conversion of the reserves and surplus of the company into shares. Bonus shares can be issued only by companies which have accumulated large free reserves i.e. reserves not set apart for any specific purpose and which can be distributed as dividend. However, bonus shares can be issued out of balance in the share premium account.

Stock split: A stock split is a corporate action that increases the number of the corporation's outstanding shares by dividing each share, which in turn diminishes its price. The stock's market capitalization, however, remains the same, just like the value of the $100 bill does not change if it is exchanged for two $50s. For example, with a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half: two shares now equal the original value of one share before the split. The prices of 5 companys share that is 15 days before the issue of bonus share and 15 days after the issue of bonus share were taken into consideration. The companies are Reliance Industry, Jindal Steel, TCS, Anus Laboratories, Falcon Tyres. We can notice that in some cases prices rise much before the event date, Where the information announced on the event date do not impact the market in many cases .this is because of Leakage of information In the case of other companies the share price is increasing after the bonus issue because of proper issue and good will.

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Impact of Bonus Issue on Market Price

INTRODUCTION
Over the years the relationship between bonus issues and stock prices has been the subject of much empirical discussion within the finance literature. Bonus issues increase the number of equity stocks outstanding but have no effect on stockholders proportional ownership of stocks. The bonus issue date is known well in advance and therefore should contain no new information. But one should not expect any significant price reaction on bonus issue announcement. However empirical studies of bonus issues and stock dividends have documented a statistically significant market price reaction. It is, therefore, a matter of concern that firms announcing bonus issues experience rise in their stock prices on an average supporting semi-strong form Efficient Market Hypothesis (EMH). Generally, the investigation of semi-strong form market efficiency has been limited to the study of well-developed stock markets. The aim is to examine the stock price reaction to information release of bonus issues with a view of examining whether the Indian stock market is semi-strong efficient or not. The event study methodology has been used to contribute further evidence on the efficiency characteristics of the Indian stock market.

Bonus Share
Companies issue shares in lieu of consideration. The consideration may be either in the form of cash or kind. Bonus shares are issued to the existing shareholders without payment of any consideration, either in cash or kind. Bonus shares are issued by conversion of the reserves and surplus of the company into shares. Bonus shares can be issued only by companies which have accumulated large free reserves i.e. reserves not set apart for any specific purpose and which can be distributed as dividend. However, bonus shares can be issued out of balance in the share premium account.

For some years now, the issue of bonus equity shares has been a common phenomenon on the Indian bourses. However, one reads about other types of bonuses being issued by companies to shareholders. While some issue bonus dividends, while others proposes to issue bonus preference shares. The big question: what will be the tax treatment of the different types of bonuses, and which is more beneficial?

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Impact of Bonus Issue on Market Price Advantages of issuing Bonus Shares


1. It

bridges the gap between capital and fixed assets the market price of its shares

2. Increases 3. Creates 4. Good

confidence for the investors / shareholders in the company

market reputation Liquidity of Shares.

5. Increases

Disadvantages
1. Shares 2. Leads

are issued without any actual money coming in.

to reduction in Earning per Share implications such as stamp duty, printing & stationery, etc

3. There are cost 4. Reduces

accumulated profits earned in past years.

Things to remember before considering Bonus Issue


1.

Bonus shares cannot be issued if the company has come out with any public / rights issue in

the past 12 months.


2. Bonus 3. Bonus

shares cannot be issued in lieu of Dividend. shares can be issued only out of free reserves (i.e. reserves not set apart for any specific

purpose) built out of the genuine profits or share premium collected in cash only.
4. Bonus 5.

shares cannot be issued out of the reserves created by revaluation of fixed assets.

If the existing shares are partly paid up, the company cannot issue Bonus Shares. It will be

appropriate to first make the shares fully paid up before issuing Bonus Shares.
6.

It should be ensured that the company has not defaulted in payment of interest or principal in

respect of fixed deposits and interest on existing debentures or principal on redemption thereof and
7. It

should be ensured that the company has sufficient reason to believe that it has not defaulted

in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.

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Impact of Bonus Issue on Market Price


8.

If the company has already issued either fully convertible debentures or partly convertible

debentures than in that case the company is required to extend similar benefits to such holders of securities through reservation of shares in proportion to their holding or in proportion to such convertible part. The Bonus Shares so reserved may be allotted to such holders at the time of conversion.
9. It

should be checked whether Articles of Association contains the provision of capitalization of

reserves. If no such provisions are contained steps should be taken by altering the Articles of Association by the consent of the members of the Company.
10.

It should be checked whether the post bonus capital is within the limits of authorized share

capital. If it is not so, steps should be taken to increase the authorized share capital by amending memorandum and articles of association.
11.

It is very important for a company to implement the bonus proposal within a period of six

months from the date of approval at the meeting of the Board of Directors. The company has no option to change the decision.
12.

All the shares so issued by way of bonus will rank pari-passu with the existing shares. The

company cannot create any other rights for the bonus shares.

What happens when bonus shares are issued? It does not mean they are credited to your de-mat account immediately. You need to know what you can and cannot do with your portfolio during this interval. Investors have been flooded with bonus issues from a lot of companies and this has made most of them quite happy. One must know that the whole process involves knowing that there could be a time difference from the moment the price is adjusted in the secondary market and when the bonus shares actually come into the investor's account. This can also be better understood by looking at the procedural aspects that can impact the way investors make their investment decisions. First, consider the steps in the entire bonus process. The company announces a bonus ratio and will undertake compliance with the necessary legal requirements to complete the process. Thus, for example, where the bonus shares are issued in a ratio of 1: 1, it means that one share would be allotted for

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Impact of Bonus Issue on Market Price Every share already held in the company. Similarly, a ratio of 2:1 would mean that two shares are allotted for one existing share in the company. The record date is announced and the investors wait for the specific date to get the required benefits. The record date is important because holders of the shares on this particular day will be entitled to the bonus shares. There is another date that has to be noted carefully by the investors, which is the date when the shares go 'ex bonus'. What happens is that on this day, the share prices adjust in the bonus ratio so that it reflects the actual situation on the ground. The reason why the price reflects the situation on the ground is that after the price is adjusted, investors will be ineligible for the actual bonus shares. Often, there is a time when there might be a no-delivery period on the stock exchanges and due to this; the ex-bonus date has to be noted carefully. Up to this stage, everything is fine as things are in tune with the normal procedure that many investors understand but now comes a surprise that many will not be prepared for. On the date the shares go ex-bonus, the price of the share corrects in the market, so, for example, a share with a price of Rs 200 will become Rs 100 in the case of a bonus issue in the ratio of 1: 1. Now, watch out for the time when the new shares are credited to the account. Often, it takes quite some time for the shares to actually come into the account. Assume that the shares come into the account after 15 days of the share price correction for the issue. During this time interval, the shareholders find themselves in a peculiar situation because they are stuck with a lesser portfolio value. Thus, if the portfolio value of scrip for an investor was, say, Rs 1lakh, then till the time the new shares come into the account, it could show as Rs 50,000 and there is little that the investor can do till the bonus shares are credited into the account. This impacts the investors in different ways. The first is that the value of their portfolio goes down temporarily without them doing anything. So, investors analyzing their portfolio in the relevant time period need to keep this in mind. The second is that till the time the new shares come into the account, there is nothing that the investor can do about trading in these shares and hence, that part of the portfolio is not accessible for the intervening period. One has to be very careful because selling shares without them being present in the de-mat account, can cause problems for investors. Investors have only one way to tackle this issue and that is by being aware of the situation so that they do not plan and implement transactions dealing with

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Impact of Bonus Issue on Market Price such shares till they are credited to their accounts. It has to be remembered that the original shares remain with the investor so that they can make use of these but plans for the new shares will have to wait. The time period of the share transfer can also stretch to more than a couple of weeks as has been seen in several well known issues and this also have to be taken into consideration.

Do stock prices in an efficient market follow a random walk? We can answer the question by looking at the meaning of efficient market and random walk. Take Company X. If there is good information flow in the market, its stock price will reflect all information that is publicly available. If the company, for instance, has bagged a contract from a major client, the current price of the stock will reflect that information. We can then say that the investors have "efficiently" priced the stock. Now extend this concept to the entire market. If prices in the stock market reflect all available information on each company, we can say that the market is "efficient". When the stock price reflects all public and private information, we say that the market is strong form efficient. If the stock price reflects only public information, we say that the market is either weak form or semi-strong form efficient. So, how does efficient market help us in understanding stock price movements? We know that information drives stock prices. It follows logically that the change in stock price will be driven by the arrival of new information. But we do not know when a new of set of information will arrive in the market. To use a financial parlance, we can say that information arrival is a random process. If the arrival of new information itself is a random process, the change in stock price should also follow a random process. So, we say that stock price follows a random process or a random walk. Of course, the assumption is that investors do not have access to inside information on the company. For investors who do, the market may not be "efficient", and may not, hence, follow a random walk.

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Impact of Bonus Issue on Market Price Semi Strong Form Efficiency


1.

Share prices adjust instantaneously and in an unbiased fashion to publicly available new

information, so that no excess returns can be earned by trading on that information.


2.

Semi-strong-form efficiency implies that Fundamental analysis techniques will not be able to

reliably produce excess returns.


3. To

test for semi-strong-form efficiency, the adjustments to previously unknown news must be

of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.

Event studies The greatest amount of research in finance has been devoted to the effect of an announcement on share price. These studies are known as .Event Studies. Initially event studies were undertaken to examine whether markets were efficient, in particular, how fast the information was incorporated in share price. For example, when a firm announces earnings will be much larger than expected, will this be reflected in share price the same day or over the next week? Dozens of studies confirmed that share prices reacted rapidly to announcements, and in expected ways where the direction of the price change and the likely impact were clear. Consequently, many authors accept that information is rapidly incorporated in share price and use event studies to determine what information is reflected in price and, if its impact is unclear, to determine whether the announcement is good or bad news

Conducting Event Studies


1. Collect

a sample of firms that had issued bonus. precise day of the announcement and designate this day as zero

2. Determine the 3. Define the 4. For each

period to be studied abnormal. Returns for each of the days being studied for each firm in the sample
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of the firms in the sample, compute the returns on each of the days being studied

5. Compute the

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Impact of Bonus Issue on Market Price


6.

Compute for each day in the event period the average abnormal return for all the firms in the Often the individual days abnormal return is added together to compute the cumulative

sample
7.

abnormal return from the beginning of the period


8. Examine and

discuss the results

Whether Bonus shares are miraculous?


Few things match the sheer joy of getting a fat bonus at work. That is what shareholders of a good company feel when their company decides to throw a few shares (free of cost) in their direction. Heres explaining what bonus shares are all about and why investors like investing in such companies. Free shares are given to you and are called bonus shares. Make money with shares. They are additional shares issues given without any cost to existing shareholders. These shares are issued in a certain proportion to the existing holding. So, a 2 for 1 bonus would mean you get two additional shares -- free of cost -- for the one share you hold in the company. If you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. That means your total holding of shares in that company will now be 300 instead of 100 at no cost to you. Bonus shares are issued by cashing in on the free reserves of the company. The assets of a company also consist of cash reserves. A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital. What is the biggest benefit in issuing bonus shares is that its ads to the total number of shares in the market. Say a company had 10 million shares. Now, with a bonus issue of 2:1, there will be 20 million shares issues. So now, there will be 30 million shares. This is referred to as a dilution in equity. Now the earnings of the company will have to be divided by that many more shares. Since the profits remain the same but the number of shares has increased, the EPS (Earnings per Share = Net Profit/ Number of Shares) will decline. Theoretically, the stock price should also decrease proportionately to the number of new shares. But, in reality, it may not happen.
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Impact of Bonus Issue on Market Price A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not Confident of being able to increase its profits and distribute dividends on all these shares in the future.

A bonus issue is taken as a sign of the good health of the company.


When a bonus issue is announced, the company also announces a record date for the issue. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus. After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.

Issue of bonus shares


Bonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. There are some conditions Which need to be satisfied before issuing Bonus shares? 1) Bonus shares can be issued by a company only if the Articles of Association of the Company authorizes a bonus issue. Where there is no provision in this regard in the Articles, they must be amended by passing special resolution act at the general meeting of the company. 2) It must be sanctioned by shareholders in general meeting on recommendations of BOD of company. 3) Guidelines issue by SEBI must be complied with. Care must be taken that issue of bonus shares does not lead to total share capital in excess of the authorized share capital. Otherwise, the authorized capital must be increased by amending the capital clause of the Memorandum of association. If the company has availed of any loan from the financial institutions, prior permission is to be obtained from the institutions for issue of bonus shares. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained.
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Impact of Bonus Issue on Market Price Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares. It is important to note here that Issue of bonus shares does not entail release of companys assets. When bonus shares are issued/credited as fully paid up out of capitalized accumulated profits, there is distribution of capitalized accumulated profits but such distribution does not entail release of assets of the company.

Issue of Bonus Shares by Public Sector Undertakings


It has come to the notice of the Government that a number of Central Government Public Sector Undertakings are carrying substantial reserves in their balance sheets against a relatively small paid up capital base. The question of the need for these enterprises to capitalize a portion of their reserves by issuing Bonus Shares to the existing shareholders has been under consideration of the Government. The issue of Bonus Shares helps in bringing about at proper balance between paid up capital and accumulated reserves, elicit good public response to equity issues of the public enterprises and helps in improving the market image of the company. Therefore, the Government has decided that the public enterprises, which are carrying substantial reserves in comparison to their paid up capital sold issue Bonus Shares to capitalize the reserves for which the certain norms/conditions and criteria may be followed and fulfilled. There are some SEBI guidelines for Bonus issue which are contained in Chapter XV of SEBI (Disclosure & Investor Protection) Guidelines, 2000 which should be followed in deciding the correct proportion of reserves to be capitalized by issuing Bonus Shares. Private sector banks, whether listed or unlisted, can also issue bonus and rights shares without prior approval from the Reserve Bank of India. Liberalizing the norms for issue and pricing of shares by private sector banks, the RBI said that the bonus issue would be delinked from the rights issue. However, central bank approval will be required for Initial Public Offerings (IPOs) and preferential shares. These measures are seen as part of the RBI's attempt to confine it-self to banking sector regulation and leave the capital market entirely to the SEBI. Under the guidelines, private sector banks have also been given the freedom to price their subsequent issues once their shares are listed on the stock exchanges. The issue price should be based on merchant bankers' recommendation, the RBI has said. It means though RBI approval is not required but pricing
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Impact of Bonus Issue on Market Price should be as per SEBI guidelines. The RBI, however, clarified that banks will have to meet SEBI's requirements on issue of bonus shares. As per current regulations, private sector banks whose shares are not listed on the stock exchange are required to obtain prior approval of the RBI for issue of all types of shares such as public, preferential, rights or special allotment to employees and bonus. Banks whose shares are listed on the stock exchanges need not seek prior approval of the RBI for issue of shares except bonus shares, which was to be linked with rights or public issues by all private sector banks.

Bonus Issue & SEBI Guidelines


The SEBI has issued guidelines for Bonus issue which are contained in Chapter XV of SEBI( Disclosure & Investor Protection) Guidelines, 2000. A company issuing Bonus Shares should ensure that the issue is in conformity with the guidelines for bonus issue laid down by SEBI (Disclosure & Investor Protection) Guidelines, 2000. It is a detailed guideline which talks about that the bonus issue has to be made out of free reserves, the reserves by revaluation should not be capitalized. Bonus issue should not be made in lieu of dividend. There should be no default in respect to fixed deposits. Bonus issue should be made within 6 month from date of approval. This is not exhaustive but a lot of things are more in the guidelines regarding this.

The Balance-Sheet perspective


Rewarding by bonus shares means actual capitalization of reserves. Rewarding by split does not mean anything from the balance-sheet perspective. It only increases the liquidity of stock by reducing the paid-up capital. If the corporate comes up with further new share issues, by way of private placement, the lower base of the paid-up capital and the higher percentage stake of new investors can be attractive features if the capital has only been split. If expanded by bonus shares, then, the existing shareholders would already have a higher stake vis--vis further new issue size. Of course, the equity dilution will be lower in that case.

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Impact of Bonus Issue on Market Price As per Section 55 of The Income-Tax Act, 1961 bonus shares entail zero costs while all the purchase cost can be loaded on to the original shares. For bonus shares, the one-year holding requirement for Long-Term Capital Asset (LTCA) eligibility starts from the allotment date of bonus shares. In the case of split, the one-year eligibility is along with the original form of capital, which is split. In other words, the one-year does not start on the split date but on the date of purchase of original shares.

Capital v/s Revenue Expenditure: Fusion & Confusion


It is said that India has the most complex Income-tax legislation. The tax system bristles with complexities and uncertainties. Consequent upon this there are problems of evasions and avoidance. As such, let us probe two fiercely debated concepts of taxation laws i.e. Capital & Revenue Expenditure which is very much relevant mentioning here. These two propositions are rays with different wave-lengths but from the same source. While the former is susceptible to tax being more extensive, the latter is advantageous to assess. This is being done with regard to the issuance of bonus shares but simultaneously dealing with other tests mechanism. The controversy was whether the expenditure incurred by the assessee Company on account of issue of bonus shares was Revenue Expenditure or a Capital Expenditure. This was remotely connected with Section 37 of The Income Tax Act, 1961 and Section 75 (1)(c)(I) of the Companies Act, 1956. On this issue, there was a conflict of opinion between the High Courts of Bombay & Calcutta on the one hand and Gujarat & Andhra Pradesh on the other. The Bombay and Calcutta High Courts were of the view that the expenses incurred in connection with bonus shares is a revenue expenditure whereas Gujarat and Andhra Pradesh High courts have taken a contrary view and have ruled that the expenses incurred in connection with the bonus shares is in the nature of capital expenditure because it expanded the capital base of the Company. This matter went to the Apex Court in the case of CIT, Mumbai v. General Insurance Corporation. In the instant case before their Lordships the assessee Company had during the concerned accounting year - incurred expenditure separately for the increase of its authorized share capital and the issue of bonus shares. The assessee being unsuccessful at various forums
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Impact of Bonus Issue on Market Price finally went to the Supreme Court on the second category i.e. the nature of expenditure incurred in the issuance of bonus shares. In Empire Jute Company Ltd v.CIT Supreme Court laid down the test for determining whether a particular expenditure is revenue or capital expenditure. It was observed that there was no all-embracing formula, which could provide ready solution to the problem, and that no touchstone had been devised. It laid down that every case had to be decided on its own canvass keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. The Apex Court endorsed the text laid down by Lord Cave, LC, in Altherton v. British Insulated and Helsby Cables Ltd. In this case it was observed that when an expenditure was made, not only once and for all but with a view to bringing into existence an asset of advantage for the enduring benefit of a trade then there was a very good reason for treating such an expenditure as properly attributable not to Revenue but to Capital. This brings us to the crux of the problem. One of the arguments that could be advanced is that the expenses incurred towards issue of bonus shares conferred an enduring benefit to the Company, which resulted in an impact on the capital structure of the Company, and in that perception it should be regarded as capital expenditure. Conversely, the issuance of bonus shares by capitalization of reserves was merely reallocation of a companys fund and there was no inflow of fresh funds or increase in the capital employed which remained the same therefore did not result in conferring an enduring benefit to the Company and therefore the same should be regarded as revenue expenditure. The enduring benefit is of paramount importance while examining the rival contentions with which these two concepts are interwoven. There is also no unanimity in verdicts of various High Courts. In the back ground, the Supreme Court laid down the test whether a particular expenditure was Revenue or Capital in Empire Jute Company Ltd. v. CIT whereas the cases of Karnataka and Gujarat High Court dealt with the issuance of fresh shares and therefore the ratio decided of these courts did not apply to the issuance of bonus shares. However, the view as taken appears to be as laying down correct law. The Supreme Court did not agree with the observation of learned author A. Ramaiya which was of the view that while issuing bonus shares a Company converts the accumulated large surplus into Capital and divides the Capital among the members in

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Impact of Bonus Issue on Market Price proportion to their rights. The learned author felt that the bonus shares went by the modern name Capitalization of Shares. The Apex Court has, therefore, marshaled the entire arithmetic and

chemistry of the two very important propositions of the taxation law i.e. Capital expenditure and Revenue expenditure and made over a conceptual clarity by reiterating the evolved principle of enduring benefit vis--vis reallocation of a Companys fund. The court has also laid down acid test for determining these two contingencies although the occasion was the event of issuance of bonus shares. The Capital expenditure is expenditure for long-term betterments or additions. This expenditure is in the nature of an investment for future chargeable to capital asset account whereas revenue expenditure is incurred in the purchase of goods for resale, in selling those goods and administering and carrying of the business of the Company. The freewheeling dissections by the Apex Court in Commissioner of Income Tax v. General Insurance Corporation of the various limbs of these twin concepts have cleared much of the haze. The Court held that the expenditure incurred in connection with the issuance of bonus shares is in the nature of revenue expenditure. The Bench said the issue of bonus shares by capitalization of reserves is merely a reallocation of companys funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. If that be so, then it cannot be held that the Company has acquired a benefit or advantage of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. Issue of bonus shares does not result in the expansion of capital base of the company.

Conclusion
The economy is booming, the markets are buoyant, and Indian companies are increasing their profitability. Consequential of all this, many companies have announced issues of bonus shares to their shareholders by capitalizing their free reserves this year. In this bullish market, shareholders have benefited tremendously, even after accounting the inevitable reduction in share prices post-bonus, since the floating stock of shares increases. The whole purpose is to capitalize profits. We can say that Bonus shares go by the modern name of Capitalization Share. Fully paid bonus shares are not a gift distributed of capital under profit. No new funds
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Impact of Bonus Issue on Market Price

are raised. Earlier there was also a lot of confusion & chaos between the two fiercely debated concepts of taxation laws i.e. Capital & Revenue Expenditure which was finally settled after the case which come up in SC in 2006, named Commissioner of Income Tax v.General Insurance Corporation. Now it is also settled law that a bonus issue in the form of fully paid share of the company is not income for the Income Tax purpose. The undistributed profit of the company is applied and appropriated for the issue of bonus shares.

What are bonus shares?


Bonus shares, as the name suggests, are issued free to existing stockholders in proportion to the number of stocks held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus shares is transferred from the reserves to the equity capital in the companys books of accounts. The issue of bonus stocks enlarges a stockholders stockholding without any dilution in his proportionate ownership of the company. These shares are issued in a particular proportion to the existing holding. For example, 1 for 1(written as 1:1) bonus would mean you get one additional shares, without paying anything at all, for the one share you hold in the company. Similarly if the company has declared 2:1 bonus share that means you will get two shares for one share you have. Thus a shareholder holding two shares, post bonus holds three shares of the company. Or, if you hold 100 shares of a company and a 2:1 bonus offer is declared, you get 200 shares free. After the bonus issue, total number of shares of that company will now be 300 instead of 100 at no extra cost. The company also announces a record date for the issue of bonus shares. The record date is the date on which the bonus takes effect, and shareholders on that date are entitled to the bonus. After the announcement of the bonus but before the record date, the shares are referred to as cum-bonus. After the record date, when the bonus has been given effect, the shares become ex-bonus.

Is it actually free?
Though, bonus shares dont cost to shareholders technically, bonus shares are not free. Companies do not generally distribute their entire profits to the stockholders as dividends. A fairly large part of the profit is retained and added on to what is commonly called the reserves of
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Impact of Bonus Issue on Market Price the company. Reserves are back up funds which a company keeps for meeting unforeseen increases in expenditure, and for financing its future expansion or diversification programmers. But when the reserves have more cash than required for the reinvestment, then companies use these free cash reserves for issuing bonus shares to share holders. For this, the company transfers some amount from the reserves account to the share capital account by a mere book entry. Bonus shares are issued by cashing in on the free cash reserves of the company. As, shareholders do not pay; the companys profits are also not affected by issuing these bonus shares. Bonus shares increase the total number of shares of the company in the market, i.e. after the bonus issue a company will have more free floating shares in the market. Lets see how. Suppose initially, a company had 10 million shares. This year the company decides to issue bonus shares in 2:1 proportion. With a bonus issue of 2:1, there will be 20 million shares issues in addition to 10 million existing shares in the market. So now, there will be total 30 million shares. This is also referred to as equity dilution. The earnings of the company will also have to be divided by the increased number of shares. Since, bonus issue has no impact on the profit, it remains the same but the number of shares has increased, the EPS will decline.

Will the price change after a bonus issue?


Ideally, the stock price should also decrease proportionately to the number of new shares issued. But, in reality, proportionate price changes may not occur. That happens mainly because of increased liquidity and enhanced investor confidence in the companys management. After the bonus issue, the stock becomes more liquid which makes it is easier to buy and sell. Also, issuing bonus shares signals that the company is in a position to service its larger equity. A company will not normally issue bonus stocks unless it is confident that its future growth prospects justify an expansion in its equity capital. Therefore, the expectation of a bonus issue by any company normally creates a climate of optimism and cheer in the stock markets and usually results in a rise in the price of a companys stocks just before or upon the announcement by it of a bonus issue.

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Impact of Bonus Issue on Market Price

Does bonus issue increase your gains?


Though, getting bonus shares is a positive development for the investors, bonuses may not necessarily generate free gains for investors. Bonus issue does create a tiny upward and shortlived bias because of above mentioned reasons. But for most of the companies this appreciation in price dies in the long run. If we look in Indian stock market, we see that except for some large companies like TCS, bonus issues did not add much to investor wealth, especially in the long run. In fact, investors in several companies have lost substantially, even after taking into account extra shares they received through bonus issues. Anus Lab is a notable example of this phenomenon. Anus Lab gained more than 19% the day it became ex-bonus but its price started slumping soon after. Currently Anus Lab is trading at 44% lower price compared to its prebonus price (see the list). Below table gives a list of 40 companies which issued bonus shares in FY 2009-10. As expected, most of the companies (32 out of 40) reported appreciation in stock prices soon after they became ex-bonus. But this euphoria could not stay very long for most of the companies. Out of these 40 companies, only 21 companies could maintain their price appreciation (as on 5th Feb 2010). Out of these 21 companies, only 16 companies are reporting more than 15% price appreciation. Companies like Anus lab, Vishal InfoTech, Country Condo, Veer energy and Anil Modi Oil are trading way below their pre-bonus prices. Investors, who invested in these companies with the motive of handsome appreciation in future, must have burnt their fingers badly. Investment in such companies has resulted into depletion of wealth instead of appreciation of investors wealth. So we can say that buying a share solely because of the bonus issue is a purely speculative trade. It has very little to do with enhancing investors wealth. Though companies with bonus issues attract a lot of interest in the current market which creates an up move in stock prices, the long run sustainability of the up-trend mainly depends on other factors like fundamentals of the company and general market conditions. Before making any investment decision, investors need to do through fundamental analysis of bonus-issuing companies.

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Impact of Bonus Issue on Market Price

Stock split:
All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split. A stock's price is also affected by a stock split. After a split, the stock price will be reduced since the number of shares outstanding has increased. In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares and the stock price change, the market capitalization remains constant. A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. A stock split can also result in a stock price increase following the decrease immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices. Another reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing and people assume this growth will continue in the future, and again, lift demand and prices. Another version of a stock split is the reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted (many stock exchanges will delist stocks if they fall below a certain price per share). For example, in a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would now become two million shares outstanding at $2.50 per share. In both cases, the company is worth $50 million. The bottom line is a stock split is used primarily by companies that have seen their share prices increase substantially and although the number of outstanding shares increases and price per
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Impact of Bonus Issue on Market Price share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to small investors and

provide greater marketability and liquidity in the market.

What is a stock split?


A stock split is a corporate action that increases the number of the corporation's outstanding shares by dividing each share, which in turn diminishes its price. The stock's market capitalization, however, remains the same, just like the value of the $100 bill does not change if it is exchanged for two $50s. For example, with a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half: two shares now equal the original value of one share before the split. Let's say stock A is trading at $40 and has 10 million shares issued, which gives it a market capitalization of $400 million ($40 x 10 million shares). The company then decides to implement a 2-for-1 stock split. For each share shareholders currently own, they receive one share, deposited directly into their brokerage account. They now have two shares for each one previously held, but the price of the stock is split by 50%, from $40 to $20. Notice that the market capitalization stays the same - it has doubled the amount of stocks outstanding to 20 million while simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million. The true value of the company hasn't changed one bit. The most common stock splits are, 2-for-1, 3-for-2 and 3-for-1. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. In the case of our example, divide $40 by 2 and we get the new trading price of $20. If a stock were to split 3-for-2, we'd do the same thing: 40/(3/2) = 40/1.5 = $26.6. It is also possible to have a reverse stock split: a 1-for-10 means that for every ten shares you own, you get one share. Below we illustrate exactly what happens with the most popular splits in regards to number of shares, share price and market cap of the company splitting its shares.

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Impact of Bonus Issue on Market Price Table No 1: Table showing how Stock Split takes place Stock Split 2-for-1 No of Shares Share price Market cap 3-for-1 No of Shares Share price Market cap 3-for-2 No of Shares Share price Market price Reverse Split 1-for-10 No of Shares Share price Market cap 10M $1 $10M 1M $10 $10M 10M $10 $100M 15M $6.66 $100M 10M $10 $100M 30M $3.33 $100M 10M $10 $100M 20M $5 $100M Pre-Split Post-Split

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Impact of Bonus Issue on Market Price

Why do companies issue splits if you still have the same amount of money?
Liquidity, some companies believe that their stock should be inexpensive so more people can buy it. This creates a condition where more of the company's stock is bought and sold (this is called "increased liquidity"). The problem, in theory, is that the increased activity will also leads to bigger gains and drops in the stock, making it more volatile. Many investors believe splits are a good thing. (Their thinking goes "Well, if the stock was at $15, and now it's at $7.50, it has to go back up to where it was!) This is wrong. The stock is where it was... remember that each share now represents half of the equity in the company that it did before the split. That means that each share is entitled to half the dividend, half the earnings, and half of the assets that it once was. A few corporations have been famous for their no-split policies. The Washington Post has traded well into the $600 per share range, and Berkshire Hathaway, which was at $8 a share in the 1960's, has traded as high as $150,000. This has created the welcome condition of a stable shareholder base.

Reasons for a Stock Split


If a stock split doesn't change anything, why do it? There are several reasons executives decide to split their stock, or not, mostly involving trader psychology. If a stock price rises too rapidly new investors might hesitate to put new money into the stock. A stock split resets the price lower and may make new purchases more palatable to less savvy investors. Stock splits are also used to bring a company's share price in line with other companies in the sector. On the other hand, some companies refuse to split their stocks to foster the impression of superiority and success. Warren Buffet's Berkshire Hathaway, the stock of which trades at tens of thousands of dollars per share, is a classic example of this, as is Google.

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Impact of Bonus Issue on Market Price

Ratios, Reverses and Other Considerations


While 2 for 1 is a very common ratio for a stock split, any ratio is theoretically possible depending on the company's needs; 3 for 1, 5 for 3, if the split creates fractional shares the company will keep the piece and compensate the investor in cash. Some splits, such as a 1 for 2 or 1 for 3, actually reduce the number of shares outstanding. These are called reverse splits, but function in essentially the same way. The value of the company doesn't change, but the price per share increases as the number of shares decreases. Reverse splits are often used to meet listing requirements for the major exchanges. A final consideration is the effect a split can have on options traders. The Options Trading Board splits options contracts to reflect changes in a stock, sometimes resulting in a new trading symbol for the series. Options traders should be aware of how changes in the strike price and number of contracts owned affects their exposure to volatility and time decay.

Legal framework for stock splits: The stock splits can be carried out under section 92(1)
c of the Companies Ordinance, 1984. The section reads: A company limited by shares, if so authorized by its articles, may alter the condition of its memorandum so as to subdivide its shares, or any of them into shares of smaller amount then is fixed by the memorandum. This is subject to the usual condition that the right attached to the shares must remain the same before and after the division. Under 92(3), the company can exercise the powers conferred by 92(1) only in a general meeting. The law also allows reverse splits or share consolidation under 92(1) b subject to the same conditions. The Central Depository Companys regulations also allow share splits under chapter 8D Consolidation or sub-division of securities, the regulations of the exchanges are silent on the issue of splits. Clearly, the legal framework for stock splits is in place and it is not cumbersome either. Bringing About stock splits: So far there hasnt been any case of a listed company splitting its shares. Ironically, there has been one case of reverse splits, i.e. share consolidation of Indus Dying& Manufacturing Limited, listed at the KSE. Why is that? We are of the view that splits
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Impact of Bonus Issue on Market Price have not happened because having adequate liquidity in their stock is not a significant concern of the management in our corporate sector. Since operational complexity creates hidden costs, exchanges and National Clearing Corporation have also not been vocal in making a case for standardization of market lots and share splits. Splits change the par value. The concept of par, however, already has been made obsolete in a number of jurisdictions because of its economic irrelevance. It should not be a consideration in bringing about stock splits. In the absence of sufficient incentive for the corporate to go for the split, the exchange should make splits mandatory through its regulation once a stock meets prespecified criteria. Why Split?

Perception Some companies worry when the per share price gets too high that it will scare off some investors, especially small investors. Splitting the stock brings the per share price down to a reasonable level.

Liquidity If a stocks price rises into the hundreds of dollars per share, it may reduce the trading volume. Increasing the number of outstanding shares at a lower per share price aids liquidity.

Criteria for splits: The regulatory criteria for mandatory splits should include price, free
float and investor interest in a stock. There are 25 companies listed at the KSE, which have a price above Rs100 as of January 22, 2003. These include: the unlived, the PSO, the shell, the Pakistan Oilfields, the Wyeth etc. In our opinion, a price above Rs100 is on the higher side. In some of these stocks investor interest and free float are virtually non-existent. Increasing or decreasing their market lots would not influence their liquidity or encourage entry of small investors. The exchange can simply bring their market lots to multiples of 500 without bothering about splits.

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Impact of Bonus Issue on Market Price One can say that if we are going to have a market lot of only 500 shares, then splits should be made such that every existing shareholder gets a market lot. For instance, if someone subscribed to only 100 shares at the time of their public offer, then raising the market lot to 500 would turn these lots into odd lots, which cannot be traded on the main board. Selling an odd lot is difficult and usually an investor has to pay a discount from the prevailing price to be able to sell it. Either the investors with odd lots would have to bear some costs for the benefit of investor at large or odd lots would have to be facilitated.

Is it good for Investors?


Some investors say a stock split is a sign that a stock is doing well and they consider it a buy signal. I would caution reading too much into a stock split by itself. You should always look at the whole picture before making an investment decision. If you want to use stock splits as a marker for stocks to consider for further evaluation, that is a reasonable idea, but dont stop there with your research. If you are interested in following stock splits, MSN Money publishes a stock split calendar that lists upcoming splits.

Caution
You should watch out for one type of split as a possible danger signal and thats the reverse split. In a reverse split, the company reduces the number of outstanding shares and the per share price rises accordingly. For example: a company might execute a 1-for-2 reverse stock split, which means for every two shares you own, you would now own one and the per share price doubles. A reverse stock split is often used to prop up a stocks price, since the price rises on the split. Often a company will do a reverse split to keep the stock price from falling below the minimum required by the stock exchange where it is listed. Clearly, this is a sign that something is wrong if a company cant keep its stock price above the exchanges minimum listing price and caution is advised.

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Impact of Bonus Issue on Market Price

Conclusion
When you paid stockbrokers based on the number of shares you purchased, it made sense to buy a stock before it split. However, most brokers now charge a flat fee, so timing a purchase before or after a split doesnt make much sense from that perspective. Ultimately, you should buy a stock based on whether it meets the fundamental standards you require and not on whether it will or will not split. Say you had a $100 bill and someone offered you two $50 bills for it. Would you take the offer? This might sound like a pointless question, but the action of a stock split puts you in a similar position. In this article we will explore what a stock split is, why it's done and what it means to the investor. 2Say you had a $100 bill and someone offered you two $50 bills for it. Would you take the offer? This might sound like a pointless question, but the action of a stock split puts you in a similar position. In this article we will explore what a stock split is, why it's done and what it means to the investor. The most important thing to know about stock splits is that there is no effect on the worth (as measured by market capitalization) of the company. A stock split should not be the deciding factor that entices you into buying a stock. While there are some psychological reasons why companies will split their stock, the split doesn't change any of the business fundamentals. In the end, whether you have two $50 bills or one $100 bill, you have the same amount in the bank.

Reasons for issuing bonus shares


1. The bonus issue-tends to bring the market price per share within a more popular range. 2. It increases the number of outstanding shares. This promotes more active trading. 3. The nominal rate of dividend tends to decline. 4. The share capital base increases and the company may achieve a more respectable, size in the eyes of investing community. 5. Shareholders regard a bonus issue as a firm indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividend.

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Impact of Bonus Issue on Market Price 6. It improves the prospects of raising additional funds. In recent years many firms have issued bonus shares prior to the issue of convertible debentures or other financing instruments.

Regulations for issue of bonus shares


Listed companies have to follow the provisions of chapter Xth of SEBI (Disclosure and investor protection) Guidelines, 2000 while issuing Bonus share. The following are the pre-condition to be complied with by the Listed Companies.

(A)Legal
1. If the authorized capital is not sufficient, the Authorized capital should be first increased which will enable further issue of share. Then the issue of bonus shares shall be considered. 2. It should be checked whether-the Articles of Association of the Company should be amended first. 3. There are no restrictions regarding the ratio at which share can be issued. It can be issued grater than1:1 also.

(B) Legal requirements


1. Bonus shares shall be issued only out of free reserves built out of genuine profits or shares Premium Company held in cash equally. 2. Reserves created by revaluation of fixed assets cannot be capitalized. 3. Bonus shares shall be issued in lieu of dividend. 4. All the partly paid share, if any, should be first made fully paid up.
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Impact of Bonus Issue on Market Price 5. There should not be any default in (a) Payment of interest on fixed deposits. (b) Payment of principal on fixed deposits. (c) Payment of interest on debentures. (d) Payment of principal on redemption of debentures. (e) Payment of statutory dues to the employees on contribution of provident gratuity, Bonus, etc. 6. When convertible debentures/partially convertible debentures are pending for conversion into equity shares, the company shall not issue Bonus shares to the existing shareholders without extending such benefit to the holders of these instruments also on issued at the time of conversion of the debentures. fund,

(c) Other condition:


1. The proposal to issue Bonus shares should be implemented within six months from the date of Board resolution. 2. The decision to issue Bonus shares shall not be reversed by the Board Approach required. (a) The Board of Directors of the Company will have to first consider the proposal and approve the same and call a general meeting of members to approve the proposal. (b) Shareholders have to approve the issue of bonus shares. (c) A record date has to be fixed thereafter by giving notice of 42 days to the stock Exchanges and a list of shareholders who are eligible to receive Bonus shares have to be determined. Income tax angle per section 55(2) (3a) of the income tax act, 1961, in the case of issue of bonus shares, the cost acquisition will be taken as nil.
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Impact of Bonus Issue on Market Price In the case of sale of these shares, it will attract capital gain tax. (13) Applicable for issue by a Designated Financial institution Designated Financial Institution (DFI) is one. Which a public financial institution is as defined under section 4A of the companies act, 1956 or an industrial! Development Corporation established by state Government or a financial institution approved under section 36(I) (Vii) of income tax act, 1961. Chapter XII in SEBI Guidelines covers issues by Designated Financial Institutions including issue of Bonus shares by DFIs.

Conditions:
The following are the conditions to be complied with by a DFI: (a) The bonus issue is made out of free reserves built out of genuine profits or share premium collected in cash. (b) Reserves created by revaluation or sale of fixed assets are not capitalized. (c) The residual reserves after the proposed capitalization shall be at least forty percent of the increased paid up capital. (d) The following reserves can be considered as free reserves for the purpose of calculation of residual reserves only. Any special reserve created for the purpose of seeking tax benefits. Capital reserves created as a result of sale of assets. Any reserve created without accrual of cash resources, and. Any other reserve not being in the nature of free reserves, even though it cannot be capitalized. (e) All contingent liabilities disclosed in the audited accounts shall be taken into account in the calculation of the residual reserves, namely they shall be deducted from reserves. (f) Thirty percent of average profit before tax for the previous three years shall yield a rate of dividend the expanded capital at ten percent at least. (g) The DFR should not have failed in the maintenance of required DER, NDSCR, during the last three years. (h) There should not be any default in: payment of principal on fixed deposits payment of interest on debentures/bonds. Payment of statutory dues to the employees on contribution to provident fund, Gratuity, bonus etc.
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Impact of Bonus Issue on Market Price (i) When fully convertible debentures/partially convertible debentures are pending for conversion into equity shares, the OFI shall not issue Rights shares or bonus shares to the (j) Existing shareholders without extending such benefit through reservation to the holders of these instruments falling due within twelve months from the call: Of issue/bonus issue and the shares reserved shall be issued at the time of conversion of the debentures. Bonus shares shall not be issued in lieu of dividend. (k) All the partly paid shares, if any, should be first made fully paid up. (l) The proposal to issue Bonus shares should- be implemented within six months from the date of approval By the Board or general body whichever is later. (m) The shareholders shall be informed about the ability of the estimated rate of dividend payable during the year or the next following year after issue of bonus shares.

SEBI role in issue of bonus shares by companies:


SEBI is playing a vital role in regulating capital markets. Offer Document / prospectus for almost all types of issues are sent to SEBI for their comments. SEBI has framed guidelines for all types of issues including Bonus issue. In case of Bonus Issue, there is no offer document as there is no involvement of any consideration. No funds are coming into the corpus of the company. Therefore, companies are required to just follow the guidelines issued by SEBI. Companies are not required to take any specific approval from SEBI

Things to remember before considering Bonus Issue:


1) Bonus shares cannot be issued if the company has come out with any public rights issue in the past 12 months. 2) Bonus shares cannot be issued in lieu of dividend. 3) Bonus shares can be issued only out of free reserves (i.e. reserves not set apart for any specific purpose)built out the genuine profits or share premium out of the genuine profits or share premium collected in cash only.

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Impact of Bonus Issue on Market Price 4) Bonus shares cannot be issued out of the reserves created by revaluation of fixed assets. 5) If the company has already issued either fully convertible debentures or partly convertible debentures than in that case the company is required to extend similar benefits to such holders of securities through reservation of shares in proportion for their holding or in proportion to such convertible part. The Bonus shares so reserved may be allotted to such holders at the time of conversion. 6) If the existing shares are partly paid up, the company cannot issue Bonus shares. It will be appropriate to first make the shares fully paid up before issuing Bonus shares. 7) It should be checked whether Articles of association contains the provision of capitalization of reserves. If no such provisions are contained steps should be taken by altering the Articles of Association by the consent of the members of the company. 8) It should be checked whether the post bonus capital is within the limits of authorized share capital. If it so, steps should be taken to increase the authorized share capital by amending memorandum and articles of association. 9) It is very important for a company to implement the bonus proposal within a period of six months from the date of approval at the meeting of the Board of Directors. The company has no option to change the decision. 10) All the shares so issued by way of bonus will rank pari-passu with the existing shares. The company cannot create any other rights for the bonus shares.

Steps involved in issuing Bonus shares:


a) As per the listing agreement, at least 7 days prior to the board meeting in which bonus will be considered, a notice has to be given to each stock exchange where securities of the companies are listed about the declaration of bonus shares. b) At the Board meeting approve the following. c) Bonus Ratio d) Fixation of Record Date or Book Closure Notice

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Impact of Bonus Issue on Market Price e) Notice convening general meeting for increase in authorized share capital and capitalization of reserves and amendment in memorandum & articles of association thereof. f) Intimate to such stock exchanges on the same day about the result of the board meeting immediately after the closure of the market hours. g) Intimate at least 42 days in advance to such stock exchanges about the closure of register of member or fixing of record date fixed for allotting bonus shares to such shareholders. h) If the company intend to close its register of members at least 7 days prior to the book closure, a notice has to be issued in the newspaper circulating in the district in which registered office of the company is situated. i) Send at least 21 days clear notice to all such a shareholders about the General meeting Convene and pass resolution for amending Memorandum & Articles of association pertaining to increase in authorized share capital and capitalization of reserves. j) File Form No.23 with ROC regarding amendment made in memorandum &

articles of association along with certified true copy of the resolutions passed, explanatory statement and prescribed fees. k) For increase in authorized share capital, affix stamp duty as applicable on Form No.5 and along with the prescribed fees file the same with ROC. l) Give effect to all the transfers received before the closure of register of members or fixing of record date. m) Convene a Board meeting to allot shares to those shareholders whose name appears in the register of members as on record date or at the time of closure of register of members. n) Make arrangements for the printing of share certificates. Issue share certificates in accordance with the rules prescribed for issuing share certificates (see to it that common seal and stamp duty is affixed on it and signed by two directors and an authorized signatory as per the board resolution). o) File Form No. 2 with ROC along with the list of shareholders and prescribed fees. It is very important to note that Bonus shares have to be issued within a period of 6 months from the date of Board meeting at which the bonus issue was declared.
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Impact of Bonus Issue on Market Price

Steps to be taken in regard to a Bonus Issue


1) Fixing the ratio. 2) Intimation to stock exchange about Board meeting if applicable. 3) Approval from the Board of Directors. 4) Approval from RBI for issue of shares to Non resident Indians. 5) Approval from the shareholders Record date (42 days). 6) To prepare a list of proposed allotters obtaining approval of State Government for bulk payment of stamp fees wherever considered necessary Allotment of Bonus shares by Board/Committee. 7) Issue of share certificates, issue of Bonus Shares by Unlisted Companies. The aforesaid guidelines of SEBI do not apply to unlisted companies such as public companies

whose shares are not listed on any recognized Stock Exchange, private companies and deemed public companies. These companies shall follow the provisions in their Articles of Association and Departmental Circulars and clarifications issued in this regard. The Circular No. 9/94 dated 6-9-1994 issued by the Department of Company Affairs, advises the existing private/closely held and unlisted companies not to issue bonus shares out of reserves created by revaluation of fixed assets. The Guidelines Note issued by the Institute of Chartered Accountants of India stipulates that bonus shares cannot be issued by capitalizing revaluation reserves. The non-observance of this will attract qualification in the Auditors report.

Guidelines for Bonus Issue


The Controller of Capital Issues follows these guidelines while examine the proposal of bonus issue. Such guidelines are:(i) Bonus issues are not permitted in lieu of dividend.

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Impact of Bonus Issue on Market Price (ii) There must be an internal of at least 40 months between two successive announcements of bonus issues by a company. (iii) Not more than two bonus issues are allowed over a period of five years. (iv) Bonus issues are not permitted unless partly paid up shares, if any, are made fully paid up. (v) Bonus issues are permitted only out of free reserves built out of genuine profits or share premium collected in cash only. Development Rebate Reserve is considered to be a free reserve but reserves created by revaluation of fire assets or without accrual of cash resources are not permitted to be capitalized for this purposes. (vi) At any one time, the total amount permitted to be capitalized for issue of bonus shares out of free reserves shall not exceed the paid up equity capital of the company. (vii) The residual reserves after the proposed capitalization should be at least 33 1/3% of the increased paid up capital, In calculating the minimum capital Reserve 33 1/3 %, the Development Rebate Reserve is taken into account but Capital Redemption Reserve is excluded. Any Capital Reserve on revaluation of assets or without actual of cash resources are also excluded. For this purpose, all contingent liabilities bearing on net profits shall be taken into account. (viii) 30 % of the average amount of pre-tax profits of previous three years should yield return of at least 9 % on the increased capital of the company.

(ix) A resolution should be passed approving the proposed capitalization of profits before an application is made to the Controller of Capital Issues. The resolution should clearly mention their decision regarding the rate of dividend payable on the increased capital in the year immediately after the bonus issue is made.

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Impact of Bonus Issue on Market Price

New Guidelines for Bonus Issue


A company may apply such bonus in making the partly paid up shares fully paid up without asking for cash from the shareholders. Generally, a company issues bonus shares when it has sufficient Reserves and surplus but no cash to pay off dividend. The company Law restricts the issue of bonus shares but imposing the following conditions to be compiled with by the company:(i) The Article of Association permit the issue of Bonus Shares. (ii) Such shares can be issued only out of; Accumulated Profits' or 'Share Premium Account' or 'capital Redemption Reserve Account'. (iii) Permission of the Controller of Capital Issues has been obtained irrespective of the amount Involved. (iv) The proposal of the Board of Directors had been duly approved by the shareholders in the general meeting. The company shall file a return stating the number and nominal amount of bonus shares issued together with the name and addresses of the allottees and a copy of resolution authorizing such issue within 30 days from the date of allotment. (Sec. 75)

Impact of Bonus Issue on Market Price


We have discussed the advantages of bonus issue from the point of view of the company and the shareholders n the above lines. Now, we shall discuss its impact on the market priced of the equity shares. The main advantage of bonus issue to the shareholders is that they get more cash dividend in future years if company maintains the pre-bonus rate dividend on equity shares. But the question is whether the company will be in position to maintain the rate of dividend after issuing bonus shares or mere capitalizing the accumulated profits it depends solely on the earnings capacity of the company. The future rate of dividend will naturally be lower as because the number of equity shares will be increased without any increase in its earning capacity of thus the total profits
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Impact of Bonus Issue on Market Price would be divisible among the larger number of shares thus lowering down the dividend per share. Dividend at the lower rate would adversely affect the share price in the market. But if the total cash-dividend to be received by a shareholder after bonus issue, is protected or it marginally increases, share price would not be affected much. On the other hand, if the issue of bonus shares is used as a speculative tool by the administrator or persons having vested interest in the company in order to earn higher profits for themselves, the share price in the market would invariably limits and should be detrimental to the interest of shareholders. On the country, if the company maintains the rte of dividend, the shares including bonus shares would be quoted at a much higher price which in turn would affect favorably the psychology of the investors and goodwill of the company in the eyes of investing public.

Advantages of Bonus Issue


Bonus shares offer certain advantages both to shareholders and the Company. SHAREHOLDERS
(i) Tax-Saving. The stock dividend is not taxable as income in the hands of shareholders

while cash dividend is taxable as ordinary income. (ii) Marketability of Shares. Shareholders who are in dire need of money sell their stock dividend and pay capital gain taxes which are usually less than the income tax on cash dividend. Thus, by issuing bonus shares, marketability of shares is increased. (iii) Higher Future Profits of the Company. The payment of stock dividend is normally interpreted by shareholders as an indication of higher profitability. Stock dividend is generally declared by the directors of the company only when they expect rise in earnings to offset the additional outstanding shares. Thus, it may convey some information which may have a favourable impact on the value of shares. (iv) Increased Future Dividend. In a company as been following a policy of paying a fixed rate of dividend and continues if after issuing bonus shares, the shareholders will get larger
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Impact of Bonus Issue on Market Price amount of cash dividend in future. Moreover, it may have a favorable affect on the value of shares. (v) Psychological Value. The declaration of stock dividend may have a favorable psychological effect an shareholders. It gives an impression of prosperity of the company. It helps to increase the capital value of shares in the market.

Company
The bonus issue not only is advantageous to shareholders but also to the company which issues them. The following are some of the advantages which the company enjoys by the issue of bonus issue. (i) Conservation of Cash. The issue shares allows the company to declare a dividend without using up the cash that may be used to finance the profitable investment opportunities within the company and thus company can maintain its liquidity position. (ii) Under Financial Difficulty and Contractual Restrictions. When a company faces stringent cash difficulty and is not in a position to distribute dividend in cash, or where certain restrictions to pay dividend in cash are put under loan agreement, the only way to satisfy the shareholders or to maintain the confidence of the shareholders is the issue of bonus shares. (iii) Remedy for Under-Capitalisation. In the state of under-capitalisation, the rate of divided is very much high. In order to lower down the rate of dividend, the company issued bonus shares instead of paying dividend in cash. (iv) Widening the Share Market. If the market value of a company's share is very high, it

may not appeal to small investors. By issuing bonus shares, the rate of dividend is lowered down and consequently share price in the market is also brought down to a desired range of activity and thus trading activity would increase in the share market. Now small investors may get an opportunity to invest their funds in low priced shares.

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Impact of Bonus Issue on Market Price (v) Economical Issue of Securities. The cost of issue of bonus shares is the minimum

because no underwriting commission, brokerage etc. Is to be paid on this type of issue. Existing shareholders are allotted bonus shares in proportion to their present holdings.

LIMITATIONS OF BONUS ISSUE:


Every concept would definitely have a negative shade within them and so also the bonus issue. The bonus issue not only has advantages but also certain limitation to shareholders and the company.

Shareholders
1. Leads to reduction in earnings per share: It is true that the issue of bonus shares would increase the total number of shares with the shareholders. But this increased number of shares will definitely reduce the earning per share if the earning of the company remains unchanged. Earnings per share are the total earnings of the company dividend by the number of shares outstanding. So, when the number of shares issued increases and the earnings of a company remains constant, the earnings per share would considerably reduce. 2. The issue of bonus share is just a financial gimmick as share as issued by re capitalization of reserve, which also belong to shareholders himself it is only out of the reserves the company is issuing bonus share and these reserves which is out of the past earnings also belong to the investor which the company should use for growth oriented purpose. it meanly divides the ownership of the company into a large number of share certificates. Bonus shares represent simply a division of corporate pie into a large number of pieces. In fact, the bonus issue does not give any extra or special benefit to a shareholder. His proportionate ownership in the company does not change

Company
1. Costly to administer: the bonus issue can be disadvantageous if the company declares periodic small bonus shares. The investment analysts do not adjust the earning per
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Impact of Bonus Issue on Market Price share for small issues of bonus shares. Only they adjust the significant issues of bonus shares. When the earning per share is not adjusted, the measured growth in the earning per share will be less than the true growth based on the adjusted earnings per share. As a result, the price- earnings ratio would be distorted downwards. There are also cost implications on the issue of bonus share such as duty, printing and stationary costs involved in share certificate.

2. Reduce accumulated profit earned in past years: as it is just a recapitalization of reserves it considerably reduces the profit which was earned in previous years as a result it cannot be used for growth oriented purpose. 3. Shareholders expectation about the companys profitability and efficiency increases and it sometimes becomes difficult for the company to satisfy it. The issue of bonus share will create an impression in the mind or shareholders that company is profitable and efficient enough, they would expect more of this kind in the future and sometimes the company might not be able to meet their expectations; as a result their reputation would be affected. A bonus issue by a company indicates the managements confident of strong growth. A bonus issue by a company gives a single that the management is confident of maintaining at least its present rate of dividend distribution level in the future too. The confidence of future growth may stem from a successful new product launch.

PROFILE OF THE SECURITY MARKETS


The premier Stock Exchange that pioneered the stock broking activity in India. 128 years of experience seems to be a proud milestone. A lot has changed since 1875. When 318 persons became member of what today is called The Stock Exchange, Mumbai by paying a princely amount of Re.1. Since then the countrys capital markets have passed through both good and bad periods. The journey in the 20th century has not been easy one. Till the decade of eighties, there was no scale measure the ups and downs in the Indian stock market. The stock exchange, Mumbai (BSE) in
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Impact of Bonus Issue on Market Price 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market number of stock exchanges and other intermediaries, the number of listed stocks. Market capitalization, trading volumes and turnover on stock exchanges and investor population. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparently and safety.

Stock Exchanges in India


Ahmadabad Stock Exchange Bangalore Stock Exchange Bhubaneswar Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange

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Impact of Bonus Issue on Market Price Jaipur Stock Exchange Ludhiana Stock Exchange Madhya Pradesh Stock Exchange Madras Stock Exchange Magadh Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange of India Pune Stock Exchange Saurashtra Kutch Stock Exchange Uttar Pradesh Stock Exchange Vadodara Stock Exchange Dependence on security market: Three main sets of entities depend on securities market. While the corporate and governments raise resources from the securities market to meet their obligations. The household invest their savings in securities. While the corporate sector and governments together raised a sum of Rs

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Impact of Bonus Issue on Market Price 226,911crore during 2001-2002, the household sector invested 4.3% of their financial savings through the securities market during 2001-01.

Corporate Sector:
The 1990s witnessed emergence of the securities market as a major source of finance for trade and industry. The share capital market based instrument in resources raised externally increased to 53% in 1993-94, but declined thereafter to 31% by 2000 -01.

Governments:
Along with increase in fiscal deficits of the governments, the dependence on market borrowing to finance fiscal deficits has increased over the years. The state government and the central government financed about 14% and 18% respectively of their fiscal deficit by market borrowing during 1990-91. In percentage terms dependence of the state governments on market borrowing did not increase much during the decade 1991-2002. In case of central government, it increased to 69.4% by 2001-02.

Households:
Household sector accounted for 89% of gross domestic savings during 01.53% of their savings were in financial assets. The share of financial savings of the household sector in securities (shares, debentures public sector bonds and units of UTI and other mutual funds and government securities) is estimated to have gone down from 22.9%in 1991=92 to 4.3% in 2000-01. Though there was a major shift in the saving pattern of the household sector from physical asset to financial asset s and within financial assets, from bank deposits to securities, the trend got reversed in the recent past due to high real interest rates prolonged subdued conditions in the secondary market, lack of confidence by the issuers in the success of issue process as well as of investors in the credibility of the issuers and the systems and poor performance of mutual funds the portfolio of household sectors remains heavily weighted in favor of physical assets and fixed income bearing instrument.

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Impact of Bonus Issue on Market Price

Primary Market: Corporate securities:


Average annual capital mobilization from the primary market, which is used to be about Rs. 70crore in the 1960s and about Rs.90 in the 1970s, increased manifold during the 1980s, with the amount raised in 1990-91 being Rs 4,312crore. It received a further boost during the 1990s with the capital raised by non government public companies rising sharply to Rs 26,417crore in 1994-95. The market, however, appears have dried up since 1995-96 due to interplay of demand and supply side forces. In real terms, the amount raised by non-government public companies during 2001-02 is about 60% of the amount raised a decade back in 1990-91 many investors who were lured into the market during 1992914 seem to be adopting a very cautious approach because of their frustration with some of the issuers and intermediaries associated with the securities market. They have not completely withdrawn from the market, but are looking for quality issues the availability of which has declined due to stricter eligibility criteria for public issues imposed by SEBI and the general slowdown in the economic activity simultaneously, issues have shifted focus to other avenues for raising resources like private placement where compliance is much less. Available data although scantly. Indicate that private placement has become a preferred means of raising resources by the corporate sector. It accounted for about 89% of total resources mobilized through domestic issues by the corporate sector during 2001-o2. Rapid dismantling of shackles on institutional investments and deregulation of the economy are driving growth of this segment. There are several inherent advantages of relying on private placement route for raising resources. While it is cost and time effective method of raising funds and can be structured to meet the needs of the entrepreneurs, it does not require detailed compliance with formalities as required in public or rights issues.

Government securities: The primary Issues of the central government have increased
many-fold during the decade of 1990s from Rs 8,989 core in 1990-91 to SUPPLEMENT FOR SECURITIES LAWS &REGULATION OF FINANCIAL MARKETS Rs. 1,51,126crore in
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Impact of Bonus Issue on Market Price 2002-03. The issues by state government increased by about twelve items from Rs 2,569crore to Rs.30853crore during the same period.

Secondary Market: Corporate Securities:


The number of stock exchanges increased from11 in 1990 to 23 now. All the exchanges are fully computerized and offer 100% on line trading 9,143 companies were available for trading on stock exchanges at the end of March 2003. The trading platform of the stock exchanges was accessible to 9,519 members from over 400 cities on the same date. The market capitalization grew tenfold between 1990-91 and 1999-2000. All India market Capitalization estimated at Rs. 631,921crore at the end of March 2003. The market capitalization ratio, which indicates the size of the market, increased sharply to 85% by March 2000. It, however, declined to 29% by end March 2003. Traditionally, manufacturing companies and financial services sector accounted for a major share in market capitalization. However, in the recent past, the importance of these traditional sectors has declined and new sector like, information technology, pharmaceuticals and fast moving consumer goods have picked up. The trading volumes on exchange have been witnessing phenomenal growth during the 1990s. The average daily turnover grew from about Rs. 150crore in 1990 to Rs 12,000crore in 2000, peaking at over Rs. 20,000crore. One sided turnover on all stock exchanges exceeded Rs. 10, 00,000crore during 1998-99, Rs 20, 00,000crore during 1999-2000 and approached Rs 30, 00,000crore during 2000-01. However, it declined substantially to Rs 986.954crore in 2002-03. The turnover ratio, which reflects the volume of trading in relation to the size of the market, has been increasing by leaps and bonds after the advent of screen based trading system by the NSE. The turnover ratio for the year2000-01 increased to375 but fell substantially due to bad market condition to 165 during 2002-03. The sect oral distribution of turnover has undergone significant change over last few years.

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Impact of Bonus Issue on Market Price The share of manufacturing companies in turnover of top 50 companies which was nearly 80% in 1995-96, declined sharply to about 2% in 2002-03. During the same period the share of IT companies in turnover increased sharply from nil in 1995-96 to 75% in 2002-03.

Derivatives market: Derivatives trading commenced in India in 1st July 2000. The total
exchange traded derivatives witnessed a volume of Rs.442, 343crore during2002-03 as against Rs 4,018crore during the preceding year. While NSE accounted for about 99.5% of total turnover, BSE accounted for about 0.5% in 2002-03. The market supplement for securities laws & regulation of financial markets witnessed higher volumes from June 2001, with introduction of index options, and still higher volumes with the introduction of stock options in July 2001. There was a spurt in volumes in November 2001 when stock futures were introduced. It is believed that India is the largest market in the world for stock futures.

Regulatory framework:
The four main legislation governing the securities market are: a) the SEBI act, 1992 which establishes SEBI to protect investors and develop and regulate securities market; b) the companies Act1956, which sets out the code of conduct for the corporate sector in relation to issue allotment and transfer of securities, and disclosures to be made in public issues; c) the securities contracts (regulation) Act, 1956, which provides for regulations in securities through control over stock exchanges, and d) the depositories Act 1996, which provides for electronic maintenance and transfer of ownership of De-mat securities.

Legislations:
SEBI Act, 1992: the SEBI Act 1992 establishes SEBI with statutory powers for 1. To protect the interest of investors so that there is steady flow of savings in the capital market. 2. To regulate the securities market & ensure fair practices by the issuers of the securities so that they can raise resources at minimum cost.
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Impact of Bonus Issue on Market Price 3. To promote services by brokers, merchant bankers & other intermediaries so that they become competitive & professional.

It has power to register and regulate the all market intermediaries and also o penalize them in case of violation of the provisions of the act, Rules and Regulations made there under. SEBI has full autonomy and authority to regulate and develop an orderly securities market Securities contracts (Regulation) Act, 1956: it provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transaction in securities. It gives central government/ SEBI regulatory jurisdiction over a) stock exchanges through a process of recognition and continued supervision, b) contracts in securities, and c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with prescribed conditions of central government. Depositories Act, 1996: The depository Act, 1996 provides for the establishment of depositories in securities with the objectives of ensuring free transferability of securities with speed, accuracy and securities by a) making securities of public limited companies freely transferable subject to certain exceptions; b) dematerializing the securities in the depository mode; and c) providing for maintenance of ownership record in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the companys right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirement under the companies Act have been dispensed with. SUPPLEMENT FOR SECURITIES LAWS & REGULATION OF FINANCIAL MARKETS. Companies Act, 1956: It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It

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Impact of Bonus Issue on Market Price also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information.

Rules and regulation:


The government has framed rules under the SCRA, SEBI Act Depositories Act. SEBI has framed regulation under the SEBI Act and the Depositories Act for registration and regulations of all market intermediaries, and for prevention of unfair trade practices, insider trading etc. under these Acts, Government and SEBI issue notifications, guidelines, and circular which need to be complied with by market participation. Regulators: The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department Company Affairs (DCA), and Reserve Bank of India (RBI) and SEBI. The activities of these agencies are coordinated by a High Level Committee on capital, markets. The orders of SEBI under the securities laws are appealable before a security Appellate Tribunal. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also concurrently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold related securities, and money market securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI. The SEBI Act and the depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by government and regulation by SEBI. All these are administered by SEBI. The powers under the companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public proposing to get their securities listed.

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Impact of Bonus Issue on Market Price BACKGROUND OF THE STUDY Globalization of the financial market has led to a manifold increase in investment. New markets have been opened; new instruments have been developed and new services have been launched. India has a well established capital market mechanism where in effective and efficient transfer of money capital or financial resources from the investing class to the entrepreneur class in the private and public sector of the economy occurs. Indian capital market has a long history of organized trading which started with the transaction in loan stocks of the East India Company from that time it has undergone drastic changes to meet the requirements of the globalization. The Indian Capital Market had been dormant in the 70's and 80's has witnessed unprecedented boom during the recent years. There has been a shift of household savings from physical assets to financial assets, particularly the risk bearing securities such as shares and debentures. Capital markets structure has also undergone sea changes with number of financial services and banking companies, private limited companies coming in to the scene which made the competition in the market stiffer. The Companies Act 1850, introduced the concept of limited liability to India, served to stimulate the activity in the stock market. From then number of acts are passed to boost the revolutionary change. The global capital market registered spectacular growth in the decade of 1990's which had an effect on the growth of Indian market. The world market capitalization grew at an average annual rate of 16% during the decade, it grew from about US $ 9.3 trillion in 1990 to about US $ 36 trillion in 2000 but fell to about US $ 28 trillion by 2001. The turnover on all markets taken together has grown nearly 19 times from US $ 5.5 trillion in 1990 to US $ 48 trillion in 2000 before depleting to about US $ 42 trillion in 2001. The turnover in developed markets has, however, grown more sharply than that in emerging markets. The US alone accounted for about 70% of world wide turnover in 2001. Despite having a large number of companies listed in its stock exchanges, India accounted for a merger of 59% in 2001 down from 1.06% in 2000. The stock markets world wide has grown in size as well as depth over last one decade. During the decade 1990-2000, the world market capitalization/GDP ratio more than doubled from 51%
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Impact of Bonus Issue on Market Price to 120%. Value traded GDP rose from 29% to 103% and turn over ratio shot up from 48% to 89%. The combined market capitalization of a select 22 emerging economies increased from US $ 339 billion in 1990 to US $ 2.2 trillion in 2000. The average market capitalization increased from 3.6% to 7%, annual value of shares traded increased from $ 180 billion to $ 2.2 trillion and GDP increased from 16.7% to 45.5%. For India the total capitalization grew from $ 38,567 million at the end of 1990 to $ 110,396 million at the end of 2001. Turn-over of stocks increased from $ 21,198 million in 1990 to $ 249,298 million in 2001. Market capitalization as a percentage of GDP grew from 12.2% in 1999 to 32.4% in 2001 while turnover ratio went up from 65.9% in 1999 to 191.4% in 2000. The number of listed companies in India was 5,975 as at end of 2001. There are very few countries, which have higher turnover ratio than India. Standard and Poor (SP) ranked India, 25th in terms of market capitalization, 15th in terms of total value traded in stock-exchanges and 6th in terms of turn-over ratio

Statement of the problem


The purpose of this study is to examine the adjustment of stock prices to announcements of bonus issues from different companies. To find strong evidence in supporting of semi strong form market efficiency a scientific study called Event Study is conducted. Its done to find whether there are any abnormal returns or not. Semi strong form of market efficiency implies that no abnormal returns should consistently occur after the announcement date. Several studies done before support this theory Investors would be in dilemma in investing there funds in a particular stock because of publicly available information like bonus issues, stock splits etc. This research is carried out to find whether stock price reacts to information release of bonus issues and to examine whether the Indian market is semi-strong form efficient or not.

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Impact of Bonus Issue on Market Price

REVIEW OF LITERATURE:
The Article from Journal of International Finance and Economics is published on January 1, 2007 by author. Malhotra, Madhuri; Thenmozhi, M.; Arun Kumar, G. PTI - The Press Trust of India Ltd. Has published a journal on April 14, 2006. For announcing 1:1 bonus issue . On Apr 14 (PTI) has advised Infosys and recommended a 1:1 bonus issue as well as a dividend. ... NEED AND IMPORTANCE OF THE STUDY: In common sense bonus issue is understood as a benefit to the investor as there is no additional payment of cash but this study helps to understand the various reasons behind the issue of bonus shares and the benefits and the limitations of such issues.

Objectives
To determine the impact of bonus issue on market price of shares. To know whether bonus issue increases the confidence of the investors/shareholders in the company. To know the effect good will of the company on bonus issue. To know the impact of new information (bonus issues) on share prices and how it adjusts

itself after the issue.


To determine whether market is semi-strong form efficient or not. To determine whether bonus issue Increases liquidity of shares or not.

LIMITATIONS OF THE STUDY Due to time and resource constraints study is limited to five companys shares. Time constraint for in depth study. Only share prices are considered not the quantity of shares. The study is restricted to BSE Only 15 days before and after data has been used to find out the impact Influence of other factors like mergers and acquisitions etc will also have an impact on share price
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Impact of Bonus Issue on Market Price

Research Methodology
TYPES OF THE STUDY: It is a secondary research which studies the 15 days before and 15 days after Bonus issue share prices of the all sample companies and apply statistical tools for finding it is significant or not. While during the Bonus declare how share prices will fluctuate in the stock market and what is reaction of investor these are all information gathered from the stock exchange web sites. SAMPLE SIZE: Sample of five companies taken into consideration to analyze the secondary data.

Secondary Data:
Moneycontrol.com. Financial journals.

Related information from share market website. Tools used: Tables Charts and graphs

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ANALYSIS AND INTERPRETATION OF DATA


The prices of 5 companys share that is 15 days before the issue of bonus share and 15 days after the issue of bonus share were taken into consideration. And the prices of pre-issue bonus shares and post-issue bonus share are grouped separately so as to calculate co-efficient of variation and this was compared with each other to find out which is more consistent. The data collected were tabulated using tally bars and they were analyzed by percentage technique and presented through charts and graphs Below table gives a list of 5companies which issued bonus shares in FY 2009-10. As expected, most of the companies (2 out of 5) reported appreciation in stock prices soon after they became ex-bonus. But this euphoria could not stay very long for most of the companies. Out of these 5companies, only 3companies could maintain their price appreciation (as on 5th Feb 2010). Companies like Reliance Industries, TCS, Jindal Steel, Anus Labs and Falcon Tyres are trading way below their pre-bonus prices. Investors, who invested in these companies with the motive of handsome appreciation in future, must have burnt their fingers badly. Investment in such companies has resulted into depletion of wealth instead of appreciation of investors wealth. So we can say that buying a share solely because of the bonus issue is a purely speculative trade. It has very little to do with enhancing investors wealth. Though companies with bonus issues attract a lot of interest in the current market which creates an up move in stock prices, the long run sustainability of the up-trend mainly depends on other factors like fundamentals of the company and general market conditions. Before making any investment decision, investors need to do through fundamental analysis of bonus-issuing companies.

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Impact of Bonus Issue on Market Price Table No 2: List of Companies with Bonus Issues in FY2009-10 *Prices are adjusted after bonus and splits. Prices on 5 Feb 2010. Bonus Ex-Bonus Pre Bonus Ex-Bonus Price % Ratio Date Price*(Adjusted) Price*(Adjusted)
on 5Th Feb 2010

Company

Gain/Loss Gain/Loss @Ex Bonus Price @current Price

Reliance Industries Jindal Steel TCS

01:01

26/11/2009 1096.88

1064.6

981.3

-2.94%

-10.54%

05:01

14/09/2009 562.05

575.5

609.85 2.39%

8.50%

01:01

16/06/2009 389.3

389.8

726.05 0.13%

86.50%

Anus Labs Falcon Tyres

01:01

24/07/2009 13.03

15.6

7.22

19.72%

-44.59%

02:01

25/09/2009 155.66

156.4

179.75 0.48%

15.48%

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RELIANCE INDUSTRIES
Reliance Group The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 28 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure Limited.

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Impact of Bonus Issue on Market Price

RELIANCE INDUSTRIES Pre bonus price: Post bonus issue price: Market price: Rs. 1096.88 Rs.1064.6 Rs. 981.3 =-2.94%

Gain/Loss% on post bonus price: =1064.6-1096.88/1096.88100

Gain/Loss% at Market price:

=981.3-1096.88/1096.88100=-10.53%

From the above data, it is observed that reliance industries bonus issue has resulted into depletion of share price instead of appreciation i.e. loss% @ lost bonus price being -2.94% the current price loss% is at -10.53%

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Impact of Bonus Issue on Market Price Table No 3: Table showing the Price of Reliance Industry Before and after price and Current market price Reliance Industries Stock Prices 1096.88 Pre bonus issue price Post bonus issue price 1064.6

Market price

981.3

Stock Prices

1100 1080 1060 1040 1020 1000 980 960 940 920 Pre bonus issue price Post bonus issue price Market price

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JINDAL STEEL
In the world of business, the Jindal Organization is a celebrity. Ranked sixth amongst the top Indian Business Houses in terms of assets, the Group today is a US $10 Billion conglomerate. Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-billion, multi-locational and multiproduct steel conglomerate. The organization is still expanding, integrating, amalgamating and growing. New directions, new objectives... but the Jindal motto remains the same- "We are the Future of Steel ". The group has been technology-driven and has a broad product portfolio. Yet, the focus at Jindal has always been steel. From mining of iron-ore to the manufacturing of value added steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its way to be a major global player, with its overseas manufacturing facilities and strategic manufacturing and marketing alliances with other world leaders. Jindal Organization aims to be a global player. In pursuance of its objectives, it is committed to maintain world-class quality standards, efficient delivery schedules, competitive price and excellent after sales service.ce certainty. JINDAL STEEL Pre bonus price: Post bonus issue price: Market price: Gain/Loss% on post bonus price Gain/Loss% at Market price Rs. 562.05 Rs.575.5 Rs. 609.85 =575.5-562.05/562.05100 = 2.39%

=609.85-562.05/562.05100 = 8.50%

The empirical results reveal a gain% immediately after bonus issue at 2.39%. At the same time when compared to the current Market price, it shows a gain % of marketing 8.5 %.
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Impact of Bonus Issue on Market Price Table No 4: Table showing the Price of Jindal Steel Before and After price and Current market price

Stock Prices JINDAL STEEL 562.05 Pre bonus issue price Post bonus issue price 575.5

Market price

609.85

Stock Prices
620 610 600 590 580 570 560 550 540 530 Pre bonus issue price Post bonus issue price Market price

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Impact of Bonus Issue on Market Price

TATA CONSULTANCY SERVICES


At TCS, it means achieving real business results that allow you to transform, and not just maintain, your operations. Our IT services, business solutions, and outsourcing bring you a level of certainty that no other competitor can match. You'll experience requirements that are met ontime, within budget, and with high quality; greater efficiency and responsiveness to your business; and the ability to shift investment to strategic initiatives rather than tactical functions. TATA CONSULTANCY SERVICES

Pre bonus price: Post bonus issue price: Market price: Gain/Loss% on post bonus price

Rs. 389.3 Rs.389.8 Rs. 726.05 =389.8-389.3/389.3100 = 0.13%

Gain/Loss% at Market price

=726.05-389.3/389.3100

= 85.50%

The empirical results reveal gain immediately after bonus issue a minor rise in price i.e. 0.13%. At the same time when compared to the current Market price, it shows a gain of marketing 85.5%

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Impact of Bonus Issue on Market Price Table No 5: Table showing the Price of TATA Consultancy Before and After price and Current market price TATA CONSULTANCY SERVICES Stock Prices 389.3 Pre bonus issue price Post bonus issue price 389.8

Market price

726.05

Stock Prices
800 700 600 500 400 300 200 100 0 Pre bonus issue price Post bonus issue price Market price Stock Prices

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ANUS LABORATORIES:
Anu's Laboratories Limited is an ISO 9001:2000 certified company established in 1996, engaged in manufacture of quality drug intermediates to meet the needs of international customers. The optimized process of 2,4-Dichloro-5 Fluoro Acetophenone has enabled the brand to establish itself as the flagship product of the organization. It is available to our wide customer base as a competitive product of the highest quality. Other high quality intermediates such as Chlorohexanone, 1,3-Dibromo Propane is also available to our valued customers. Our Company is also producing Methyl-4 (4-Chloro 1 oxo butyl) a, a Di-Methyl Acetate. Our state-of-the-art R&D facilities, located at Balanagar, Hyderabad, support the process of product development, contract research and customized synthesis programmes of the organization. ANUS LABORATORIES

Pre bonus price:

Rs. 13.03

Post bonus issue price: Market price: Gain/Loss% on post bonus price

Rs.15.6 Rs. 7.22 =15.6-13.03/13.03100 = 19.72%

Gain/Loss% at Market price

=7.22-13.03/13.03100

=(-44.59%)

Companies like Reliance Industries, TCS, Jindal Steel, Anus Labs and Falcon Tyres are trading way below their pre-bonus prices. Investors, who invested in these companies with the motive of handsome appreciation in future, must have burnt their fingers badly. Investment in such companies has resulted into depletion of wealth instead of appreciation of investors wealth. So we can say that buying a share solely because of the bonus issue is a purely speculative trade. It has very little to do with enhancing investors wealth. Though companies with bonus issues attract a lot of interest in the current market which creates an up move in
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Impact of Bonus Issue on Market Price stock prices, the long run sustainability of the up-trend mainly depends on other factors like fundamentals of the company and general market conditions. Before making any investment decision, investors need to do through fundamental analysis of bonus-issuing companies

Table No 6: Table showing the Price of Anus Laboratories Before and After price and Current market price ANUS LABORATORIES

Stock Prices

13.03 Pre bonus issue price Post bonus issue price 15.6

Market price

7.22

Stock Prices
20 15 10 5 0 Pre bonus issue price Post bonus issue price

Market price

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Impact of Bonus Issue on Market Price

FALCON TYRES
Falcon Tyres Limited, Located in Mysore, Karnataka , India and incorporated in 1973 is part of the RUIA GROUP headed by Chairman Mr. Pawan Kumar Ruia . Falcon Manufactures and markets a wide range of nylon bias ply tyres and butyl tubes for two and three wheelers, passenger cars , jeeps , light commercial and farm vehicles under the DUNLOP brand in Indian market and Falcon and Donin brands for export markets . In the two and three wheeler category, the company offers an unmatched choice of patterns and design constructions, catering to the different needs of its customers. Falcon is the preferred choice of leading vehicle manufactures in India including Hero Honda Motors Ltd., Bajaj Auto Ltd., Piaggiao Vehicles Pvt. Ltd. , Mahindra and Mahindra Ltd. , India Yamaha motors Ltd. ,Royal Enfield Ltd. etc. The company has entered into a Technical Aid Agreement with Sumitomo Rubber Industries Ltd. of JAPAN which will give it access to the latest International technology, new product range , upgraded product quality and best processes. Falcons aim is to give maximum satisfaction to its customers by offering the highest standards of service excellence and worldclass products. FALCON TYRES Pre bonus price: Post bonus issue price: Market price: Gain/Loss% on post bonus price Rs. 155.66 Rs.156.4 Rs. 179.75 =156.4-155.66/155.66100 = 0.48%

Gain/Loss% at Market price


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=179.75-155.66/155.66100 = 15.48%
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Impact of Bonus Issue on Market Price The empirical results reveal a gain% immediately after bonus issue at 0.48%. At the same time when compared to the current Market price, it shows a gain% of marketing 15.48%.

Table No 7: Table showing the Price of FALCON TYRES Before and after issue and Current market price

FALCON TYRES

Stock Prices

155.66 Pre bonus issue price Post bonus issue price 156.4

Market price

179.75

Stock Prices

180 175 170 165 160 155 150 145 140 Pre bonus issue price Post bonus issue price Market price

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Impact of Bonus Issue on Market Price

Table No 8: Table showing Gain/Loss on the basis of pre & post price of the selected companies Company Name
Reliance Industries Jindal Steel TCS Anus Labs Falcon Tyres

Pre price
1096.88 562.05 389.3 13.03 155.66

post price
1064.6 575.5 389.8 15.6 156.4

Gain/Loss
-2.942892568 2.393025532 0.128435654 19.7237145 0.475395092

Gain/Loss
20

15

10

0 Reliance Industries -5 Jindal Steel TCS Anus Labs Falcon Tyres

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Impact of Bonus Issue on Market Price

Table No 9: Table showing Gain/Loss on the basis of pre &Market price of the selected companies Company Name
Reliance Industries Jindal Steel TCS Anus Labs Falcon Tyres

Pre price
1096.88 562.05 389.3 13.03 155.66

Market price
981.3 609.85 726.05 7.22 179.75

Gain/Loss
-10.53715994 8.504581443 86.50141279 -44.58940906 15.47603752

Gain/Loss
100 80 60 40 20 0 -20 -40 -60 Reliance Industries Jindal Steel TCS Anus Labs Falcon Tyres

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Impact of Bonus Issue on Market Price SUMMARY This study was conducted to find whether there were any abnormal returns after the announcement of bonus issues. The objective of the study was to find whether there are any abnormal returns after the announcement date and how long does the market take to adjust to the new information. Event study methodology is used in this process there has been a few research in this field regarding reaction of stock market to bonus issue or stock split. Very few studies have conducted event study on stock market reaction to changes in government policy this study aims to do that. The study was conducted for eighteen companies from different sectors. The event period was 90 days before and 90 days after the date of announcement. The Events Studied was the announcement of bonus issue in the board of directors meeting. The data was collected from various issues of Economic Times and websites of National Stock Exchange, prowess etc.. Residual returns were found using SPSS software. These valves were averaged and t test was done to find whether the there is significant difference in means before and after the date of announcement. The results were negative, there was no significant difference. Then the residuals were cumulated and were shown in a graph. From this we could make out that there were no abnormal returns. Different companies have reacted differently to the news. For some companies the share prices have fallen before the date of announcement and for some companies it has fallen right after the information was release in the market. The reasons for stock prices to come down before the date of announcement could be information leakage or actual anticipation. Thus the conclusions drawn were the announcement of bonus issues by the companies have a mixed impact. But in general the markets have adjusted it self to the new information slowly and there was no possibility of investors making abnormal profits

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Impact of Bonus Issue on Market Price

CONCLUSION:
The study documents the market behavior around the bonus announcement date for five stocks listed on the Bombay Stock Exchange (BSE) of India in 2009. An event study was conducted using a 15 days before and 15 days after event window. It was found that on an average, the stocks started showing positive abnormal returns before the announcement date which is due to leakage of information. After the zero date i.e. the date of Board of directors meeting for stock announcement there is significant rise in CAAR and once the information is announced in the exchange the prices have fallen and adjusted. In India we can find a great difficulty in deciding the date of announcement of bonus issues. We can see from the study that to a great extent there is leakage in the information even before the Board of Directors meet. This is because, the Board of Directors meeting will be held with prior information that is recorded in the books (agenda) before 14 days. So this leads to the internal employees to know the information and hence trade in that particular stock to make more profits. Some times the information will be leaked much before the Board of Directors meeting. Thus we can notice that in some cases prices rise much before the event date, where the information announced on the event date do not impact the market in many cases. In general, the behavior of AARs and CAAR, is found to be in accordance with expectation and when lending to support the hypothesis that the Indian stock market is not semi strong form efficient. But we can notice one thing that the market is adjusting very gradually to the issues. As is evidenced, the CAAR experienced an overall increase around the announcement period, it implies that the market does not react in a positive direction. In absence of any impact, the CAAR would have been moving around zero. The increasing trend is noticed much before the announcement period which implies that the market is not able to anticipate the event. This shows that the market is not semi strong form efficient and thus it is found.

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Impact of Bonus Issue on Market Price

FINDINGS
We can notice that in some cases prices rise much before the event date, Where the information announced on the event date do not impact the market in many cases .this is because of Leakage of information A company will not normally issue bonus stocks unless it is confident that its future growth prospects justify an expansion in its equity capital. Therefore, the expectation of a bonus issue by any company normally creates a climate of optimism and cheer in the stock markets and usually results in a rise in the price of a companys stocks just before or upon the announcement by it of a bonus issue. Out of 5 companies shares only two companies shares i.e. Reliance industries and Anus labs suffering losses due to bonus issue. As per the secondary data collected Reliance industry even though having strong fundamental base & good will suffering from decline in its share prices Due to leak of information (Before the issue people/investors came to know company is going to issue bonus shares). In the case of Anus Lab the market price has been increased after the issue but later it decreased. This is because of the investors reacted well to bonus issue but later come to know the fundamental of the company so the company faced decrease in its share price. In the case of other companies the share price is increasing after the bonus issue because of proper issue and good will.

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Impact of Bonus Issue on Market Price

RECOMMENDATIONS/SUGGETIONS:
It is advisable for the investors to make a thorough analysis of the company issuing bonus shares before trading with those shares. Investors sell the shares before bonus issue because more reliable, more consistent than the after bonus issue. Bonus issue affect to the share prices is less than one year hence hold the shares till market become a normal conditions. It is advisable for the company to issue moderate ratio because if the ratio is very high the investors would treat as a financial gimmick of the company. It is necessary for the company to fare well in the future to live up to investors expectation if they want to have favorable reaction from the investors subsequent issues. It has very little to do with enhancing investors wealth. Though companies with bonus issues attract a lot of interest in the current market which creates an up move in stock prices, the long run sustainability of the up-trend mainly depends on other factors like fundamentals of the company and general market conditions. Before making any investment decision, investors need to do through fundamental analysis of bonusissuing companies. The companies which are issuing bonus share should maintain the secrecy.

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Impact of Bonus Issue on Market Price

Bibliography:
Books:
Pandian Punithavathy. Vikas publishing house. 2006 Th Edition. analysis & Portfolio management. P.K.Mittal, B.G.Satyaprasad & M.K.Pradeep Kumar Rao. Himalaya Publishing house. 2009. Business Statistics. C.R. Kothari. New age International Publishers. 2nd Edition-2008. Research Methodology. Security

Websites
http// www.bseindia.comhttp://www.bseindia.com/stockinfo/stockprc.aspx http//www.nseindia.comhttp://www.nseindia.com/
http://www.bseindia.com/stockinfo/stockprc2.aspx?scripcode=500325&flag=sp&Submit=G http://www.bseindia.com/stockinfo/stockprc2.aspx?scripcode=500410&flag=sp&Submit=G http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcd=500410 http://www.bseindia.com/datalibrary/disp.asp?flag=A&select_alp=R

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