Beware of Bonus Share Tax Loop

You sold your shares at a loss. Yet... your Income Tax Return shows a taxable Capital Gain! Sounds absurd? It isn't. A simple corporate action like a Bonus Issue can create this bizarre tax situation, catching even experienced investors by surprise.

Before you sell shares that have received bonus shares, spend five minutes reading this article. It could save you from an expensive tax mistake.

What is Follow-on Public Offer (FPO)

Investing in the stock market can be both exciting and overwhelming, especially when terms like IPO, FPO, and OFS start popping up. While most of us are familiar with IPOs (Initial Public Offerings), not many understand what an FPO is or how it works. 

In this blog post, we’ll break down the concept of a Follow-on Public Offer (FPO) in simple terms, explain how it works, and provide an example to help you relate better.

Demerger of Companies: Unlocking Value for Shareholders

Demerger is a crucial financial and strategic process in the corporate world. It serves as a mechanism to unlock value, improve focus, and ensure the independent growth of different business verticals. In this blog, we’ll explore the concept of demerger, its significance for companies and investors, a simple Indian example, and much more.

---

Definition

A demerger is a corporate restructuring process where a company splits into two or more separate entities. Each entity operates independently with its own management, goals, and focus areas. This separation allows the individual businesses to flourish, focus on their core competencies, and achieve better operational efficiencies.

In India, demergers are regulated under the Companies Act, 2013, and require the approval of various stakeholders, including the board of directors, shareholders, creditors, and courts.

Detailed Explanation

A demerger can occur in multiple ways, such as:

1. Spin-offs: A parent company creates a new entity, transferring part of its operations or assets to the new company while distributing its shares to existing shareholders.
2. Split-ups: The parent company ceases to exist, dividing itself into multiple independent companies.
3. Equity Carve-outs: The parent company sells a minority stake in the newly created entity through an initial public offering (IPO).

Purpose of a Demerger

• Focus and Specialization: By separating unrelated business divisions, each company can focus on its core operations without distractions.
• Value Creation: A demerger often reveals the true value of individual business units, which might be undervalued when combined.
• Enhanced Operational Efficiency: Smaller, focused entities tend to make quicker decisions and improve operational effectiveness.
• Regulatory Requirements: Sometimes, demergers are mandated by regulators to ensure fair competition in a particular industry.

How is a Demerger Useful for Investors?

For investors, demergers can be highly beneficial in several ways:

1. Unlocking Shareholder Value: A business unit that performs well but is overshadowed within a conglomerate can gain better market recognition after separation.
2. Focused Investments: Investors can decide which specific entity aligns with their goals and invest accordingly.
3. Better Transparency: Post-demerger, each company’s financials and strategies become clearer, aiding in informed decision-making.
4. Tax Benefits: In India, certain demergers qualify as tax-neutral, meaning shareholders are not immediately taxed on shares received from the demerged entity.

A Simple Example in the Indian Context

Let’s consider the demerger of Reliance Industries Limited (RIL), a prominent example in India.

Case Study: Reliance Jio Demerger

In 2019, Reliance Industries separated its telecom tower and fiber optic businesses into two independent entities. This strategic move allowed Jio to focus on its core telecom services while attracting external investors for the infrastructure arms.

How It Benefited Investors:

• Shareholders of RIL received stakes in the new entities.
• Jio could focus on enhancing customer services and network expansion.
• The demerged infrastructure arms attracted investments, unlocking value for shareholders.

This example demonstrates how demergers can align business goals and create opportunities for investors to benefit.

---

Summary

Demerger is a powerful strategy that allows companies to enhance focus, efficiency, and shareholder value. For investors, it provides an opportunity to realign their portfolios and take advantage of better transparency and growth prospects.

While demergers involve complex procedures and legal approvals, their outcomes can be highly rewarding if executed effectively. In the Indian corporate landscape, successful demergers like those of Reliance and Tata have set a benchmark for others.

---

Some Useful Links

What is Smart Beta or Factor Investing?

Delisting of Shares: What It Means for Investors

Switching from Regular to Direct Funds - Tax Implications and Breakeven Point

How are NRIs Taxed in India?

Related Book: The Autobiography of a Stock

Delisting of Shares

Many times, we hear about companies wanting to get listed on the stock exchanges. The reverse of this can also happen and it is termed as delisting. Let us understand what is delisting of shares and what are its consequence for an investor.

What is Short Selling of Stocks

Short-Selling, or Shorting is often in the news for all the wrong reasons. In contrast, short sellers make the market more efficient, balanced and matured.
Let us understand what short selling is, and how does it help the markets.

Evaluate Company Earnings using EBIT and EBIDTA

EBIT and EBITDA are alternate measures of profitability to net income (or Earnings). These are accounting terms which attempt to represent cash profit generated by the company’s operations.

Understanding Solvency Ratio

Before you select any insurance provider - be it vehicle, health or life insurer, make sure that you judge the financial strength of the company by looking at its Solvency Ratio.

Why can't we just copy a successful portfolio

The portfolio of Warren Buffet owned Berkshire Hathaway has always been public. Why then we don't have millions of Warren Buffets around us? Copying a portfolio just doesn't work. Read why...

Smallcase : Is it big enough?

Smallcase is not a theme, innovation, strategy, process, or idea. It's a private limited financial services company. Let us understand in-depth about smallcase before we start investing.

Treasury, Outstanding, Floating and Restricted Shares

A thing as simple as number of shares of a company can get as complicated as understanding the different types of shares company is reporting viz Treasury, Outstanding, Floating or Restricted Shares. Let us understand the difference between all these types of shares and their significance.

Statement of Cash Flow and Free Cash Flow

A Cash Flow Statement gives a good clue on company's financial health. But understanding Free Cash Flow (FCF) is even more penetrating. Read on..

Analysing Promoter Shareholding Patterns for your Stocks with Real Examples

It makes sense to keep track of what promoters are doing with their shares. It may give you a clue about where the company is headed. Let us see how to look at promoters shareholding patterns (and beyond just the data) with real life examples.

What is Economic Moat and 5 Ways to Spot Companies with Moat

You can crunch all the numbers, but numbers will always represent history. Ironically, you are buying Stocks for future gains. And history can never guarantee future. Fortunately, MOAT is one of the factors that tries to defend the historical numbers - in the future.

Announcing 2 National Bestsellers, exemplifying the beauty of Delayed Gratification

                      

 

There is something about delayed gratification that pulls a person desperately towards it, and pushes the other person out to the extent that one tends to hate it. 

The difference lies, perhaps, in whether you have understood how nature plays delayed gratification in every walk of life. 

Once you understand it, and start to love it - you will be the biggest beneficiary, as it unfolds its magic in your life..

KEEP INVESTING is an INEFFICIENT Approach to Wealth Building

A Mutual Fund SIP is supposed to be the simplest and most powerful investment option in the market even today. Though old fashioned, it needs almost negligible time investment from an investor post its setting up. But if you are just continuing to invest regularly, then you are missing one of the most vital aspects of wealth management...

9+3 Criteria in Evaluating Company's Management before buying a Stock

You may see the best of Earnings, cash flow, growth and business potential. This may just be your dream stock that you always wanted to buy. But it can all come to a zero, if the numbers were cooked up or the company's management was not reliable enough. But then, how do you judge the quality of a company's management?

Different Price for Same Stock in Different Markets? Welcome to the world of Arbitrage !

If you have been in Stock Market for some time, you would have definitely observed this phenomenon, though you may not have attached enough importance to it. But , some of the biggest successes lie in understanding the smallest things well. Understanding such finer aspects of the market gives you a very fine bird's eye view of the phenomenon called as Stocks, and helps you take wiser decisions in the long run.

Pledging of Shares by Promoters and how it impacts Stock Valuation

[Last Update : 31-May-2020]
Did you know that more than 90% of listed companies in India have pledged shares? Are you aware of the risks associated with share pledging? How much share pledging is OK? Is share pledging also good for the company? From where can you find the pledged shares percentage?... Read on...

Understanding and Interpreting Company Balance Sheets - with example

Have you ever prepared your personal sheet of Assets and Liabilities to calculate your financial net worth? Yes? 

Congratulations ! You already know how to prepare balance sheets. Company balance sheets are just a shade above your personal balance sheet of Assets, Liabilities and net worth...Read on..

What is Buyback of Shares

Did you know that businesses prefer to buy back their own shares paying a premium to shareholders? 

Were you aware that just looking at the ratios (like EPS, P/E etc.) without questioning their sudden dip or surge can lead to serious valuation mistakes? 

Do you know how business events like Stock Splits, Bonus Shares and Share Buy Backs can instantly influence the financial ratios without any change in company fundamentals?