Financial Daily from THE HINDU group of publications
Saturday, Jan 03, 2004
Corporate - Bonus Announcements
Industry & Economy - Income Tax
Markets - Stock Markets
`Bonus' announcements spell tax opportunity for investors
New Delhi , Jan 2
A SPATE of `bonus' announcements among several listed companies big and small, during the first three quarters of the financial year should help investors shelter their capital gains in the stock market, say market sources here.
Budget 2003 had provided for capital gains tax exemption for investing in the BSE 500 companies if the investor retains the share for a full year.
However, there is no distinction between shares purchased by paying for it and shares acquired free of cost through the `bonus' route for this exemption.
Stock market sources said if an investor buys 100 shares of a company that has announced a 1:1 bonus immediately after the announcement but before the record date at Rs 500 per share, ideally the price comes down to around Rs 250 per share ex-bonus.
Since it takes three months for the investor to get the `bonus' shares that he/she is entitled to, (thanks to the procedure involved) the individual investor could liquidate the original lot after the `record' date for this entitlement.
If one now sold the original 100 shares ex-bonus at Rs 250 per share, he would book a loss of Rs 25,000, while the cost of acquiring the `bonus' shares is nil as per the provisions of the Income Tax Act.
He will hold the bonus shares till one year from the date of buying the original share and get a tax exemption in the next fiscal, while the Government stands to lose revenue on both accounts.
According to market sources, while this is not illegal, it could affect the Government's annual tax collections if the trend becomes rampant.
The impact, market watchers say, will be felt by the end of the current financial year.
Companies that have made bonus announcements in the recent months include Moser Baer, Mirc Electronics, MphasiS BFL, i-flex Solutions, Sterlite Industries, Exide, Hindustan Seals, Cosmo Films, Gujarat NRE Coke and P&G Healthcare.
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