The time for which investors have to hold on to shares of a firm after buying them in an initial offering (IPO), is referred to as a lock-in period in corporate lingo. If the stock isn’t doing great, a sell-off by shareholders, which can drag down prices, is likely at the end of a lock-in period. To prevent that, some firms try to make shareholders stay invested, by offering extra shares for every stock they posses.
SEBI notices use of bonus to influence markets
These bonus allotments being announced by Nykaa and Easmytrip, just before their lock-in periods ended, has raised eyebrows at the Securities and Exchanges Board of India. The regulatory body has reportedly noticed this practice of manipulating a shareholder’s decision, and may set a time limit for announcing bonus issues. By doing so, SEBI will be able to prevent companies from getting away with offerig freebies to retain shareholders, instead of the performance of their stocks.
How do bonus issues work in this scenario?
Nykaa had announced a 5:1 bonus, which means that everyone who had the startup’s shares, would get five more for free. A day after that Nykaa saw a 19 per cent rally on the markets, and avoided pressure that is caused when too many investors sell a company’s share. High selling pressure indicates that most investors feel that a stock’s price will reduce, but Nykaa prevented that with a rally caused by the bonus issue.
Bid to avoid price rigging
The travel booking platform EastMyTrip’s parent firm also announced a 3:1 bonus, which led to a 20 per cent rise in its prices on the market. But these practices have prompted SEBI to plan a deadline for firms to implement a bonus or slit share issue, after the decision is approved in a board meeting. The move is being considered to avoid the possibility of promoters and operators manipulating share prices between the record date, and the day when people actually get bonus or split shares.