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Reliance 1:1 Bonus and the Brouhaha

Reliance, after years of ignoring shareholder demands, has finally decided to give that 1:1 bonus. Last year, they quoted large investors as being concerned about the accounting implications, which is why they ditched announcing a bonus. But this apparently didn’t exist this year. My personal feeling is they waited so the RPL merger would be complete, and then announced it.

So is the big brouhaha warranted? For most investors it makes ZERO difference. The share price will come down by half, and the number of shares will double, on the announced “ex-date”. That means your net worth does not change. With the shares priced lower, it might become more affordable so liquidity *may* increase – but with a company like Reliance which is already hugely liquid, there shouldn’t be any impact.

Does it matter to the company? No. Whatever is being distributed as “bonus” shares is simply a recapitalization of reserves. (Read “Of Shares, IPOs And Stock Markets” for background) Reserves are created by accumulation of profit (whatever is left over after paying dividends). For Reliance this is a HUGE amount – since they have been immensely profitable over the years. They can even give a 10:1 bonus and still have reserves left over.

(RIL has over 100K crores – a trillion rupees – in reserves, with only about 2000 cr. as the face value of equity shares. Some of it has complex implications with debt and FCCBs but there is a HECK of a lot left over)

A lot of people think a “bonus” is a good thing. It’s no big deal at all, in companies like Reliance, unless they were to do a 1:5 split or something bringing the price below Rs. 500 (then a lot more people get interested, for some reason). It used to be a tax saving scheme but even that’s been plugged now. Some say this will increase dividend – but by and large, dividend yield remains constant (so it’s more a function of the stock price, not the number of shares outstanding) Reliance is paying Rs. 13 per share dividend this year. Next year, they might not pay more than Rs. 6.5 per share (unless they increase profits a lot), so income remains the same.

The company made Rs. 105 per share last year which, after the bonus issue will be Rs. 52.5 per share; the current share price at Rs. 2100 discounts past earnings 20 times, and I expect a post bonus price of about 1050 to 1100 per share. The word ‘bonus’ is very positive to hear, but like most things in the financial world, things aren’t as great as they sound.

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