Bonus Stripping to Save Tax:

Investors go bonus stripping to bring down tax liabilities
18 Mar 2010, 0021 hrs IST, Vijay Gurav & Apurv Gupta, ET Bureau

Investors have been flocking to buy shares of companies offering bonus issues to reduce tax liabilities through ‘bonus stripping’. A few companies, particularly in the mid-cap space, have doled out liberal bonus issues to their shareholders, triggering action in these stocks in the past few days.

IVRCL Infrastructure, Crompton Greaves, Pidilite Industries, Hindustan Dorr-Oliver and Sterlite Technologies are among the notable examples where share prices have gained after the bonus issue. Vinod Ambavat, partner with professional advisory firm Jain Ambavat and Associates, said that bonus stripping in company shares is still in practice, though it’s not allowed for mutual fund units under section 94(8) of the Income Tax Act, 1961.

In bonus stripping, investors buy shares of companies which have announced bonus issues, and subsequently, sell the original holding at a loss once the stock becomes ex-bonus. This loss can be adjusted against their capital gains on other holdings. The bonus shares are held for a period of twelve months to claim exemption from long-term capital gains tax.

A sharp rise in trading volumes of bonus issuing companies, ahead of the record date, indicates bonus-stripping interest among investors, according to Karvy Stock Broking vice-president Ambareesh Baliga. One has to also see the trading pattern after the shares become ex-bonus. “If the price falls more than what the ratio warrants, that also reflects bonus-stripping activity,” added Mr Baliga.

Among companies doling out liberal bonus, IVRCL Infra, Pidilite Inds, Hindustan Dorr-Oliver and Sterlite Technologies offered one free share for each held by their shareholders. All the three stocks became ex-bonus (share price adjusted on the basis of bonus ratio) in the current month and recorded substantial gains ahead of their respective record dates.

Pidilite Inds rose from Rs 197 on February 26 to Rs 241 on March 12, up 22%. The stock quoted ex-bonus at Rs 114 on March 15 and closed 1.5% up at Rs 115.5 on Wednesday. Trading volumes have been on the rise, with 4.3 lakh shares changing hands a day before the stock turned ex-bonus compared to a two-week daily average of 2.5 lakh shares.

Hindustan Dorr-Oliver shares became ex-bonus at Rs 106 on March 15.

The stock rallied smartly ahead of its record date, gaining from Rs 170 on February 10 to Rs 222 on March 12, up 31%. It, however, fell 2.6% to Rs 105 on Wednesday. Sterlite Technologies also saw good momentum with a 12% rise between February 24 and March 8. The stock became ex-bonus on March 9, when it quoted at Rs 89. Apart from 1:1 bonus, the company has also split the face value of its shares from Rs 5 each to Rs 2 each.

Most of these bonus-issuing companies are fundamentally sound with strong reserves to their credit. Analysts feel liberal bonuses would not cause a major strain on their financials, as their respective book values are quite healthy. The five companies - IVRCL Infra, Crompton Greaves, Pidilite Inds, Sterlite Tech and Hind Dorr-Oliver - have equity capital ranging from Rs 7.2 crore to Rs 73.3 crore, while their reserves stood between Rs 147 crore and Rs 1,781 crore for 2008-09.

Original article: http://economictimes.indiatimes.com/markets/analysis/Investors-go-bonus-stripping-to-bring-down-tax-liabilities/articleshow/5695555.cms