Nykaa has always been in the news whether it’s the only profitable new age company that listed its IPO, having a PE of a whopping 1600 during initial listing days or getting listed at a stellar premium. Now, it has again raised the brows of the market but for the wrong reasons. Bonus issue to control share price, CFO resignation and a question mark on company’s corporate governance…
So, what’s the matter?
Bonus Issue: Genius or Blunder?
Nykaa made the headlines with the announcement of its 5:1 bonus issue which had a record date of 11th November. This date was important. So, before any company goes public, it also raises funds from private equity firms and venture capitalists. The motive of these investors is to earn profit as soon as the IPO lists at a premium. They generally hold a good percentage of the stake. If they start selling their stake on a listing day then the share price could plunge. So, SEBI has imposed a lock-in period on these pre-IPO investors.
This lock-in period was supposed to end on 10th November. So, after the lock-in period, there was a high probability that the stock prices of Nykaa could fall just as happened with Zomato. So, the record of the bonus issue was kept on 11th November.
How did it prevented investors from selling their shares?
So, whenever a bonus issue is announced, the share price gets divided by the number of shares issued. For example, if you had a single share of Rs. 1200 earlier, after the bonus issue, you would have 5 shares of Rs. 240 each. Now, on the record date, the share price will get reduced to Rs. 240 but it would take around two weeks to get shares to be credited to the Demat account. So, the investors could not sell them immediately. This would reduce the selling pressure on the lock-in date.
Also, there is another reason that will prevent a sell-off. Taxation! If you sell shares after 1 year, then, you have to pay zero tax on the capital gain of up to Rs. 1 lakh and pay 10% tax above Rs. 1 lakh. If sold within a year, the tax liability will be 15% on the capital gain. In Nykaa’s case, the investors will have to pay a 15% tax on bonus shares spite being a shareholder for more than a year. This would again prevent offloading of shares in the market.
This did work but it also highlighted that Nykaa is trying to control share prices.
CFO Resignation
Amid corporate governance rumors, Nykaa’s CFO resigned on 25th November. This strengthened the suspicions of corporate governance issues. The resignation of any C-suite executive further highlights an internal problem.