Nykaa - Cosmetic changes to impress?

?????????Corporate governance is a vaguely used term these days and promoters are often criticized for their antiques. The recent news of Nykaa’s bonus issue doesn’t sound indifferent. The brand that is known for selling cosmetics is now concealing the cracks in its repute with certain ambiguous practices.

Nykaa,?founded in 2012 by Indian entrepreneur Falguni Nayar, launched its initial public offering (IPO) on 10th of Nov, 2021. Regulatory norms in India prevent private equity funds and high net worth individuals, who were early investors, to liquidate their stake within a period of one year from the date of listing.

So, FSN E-Commerce Ventures Ltd, the parent company of Nykaa, is now trying to figure out ways to prevent the selloff. It is estimated that about 67 per cent of Nykaa’s shareholding will be released from lock-in.

To prevent this mayhem, Nykaa has now planned for a bonus issue and considered 11th of November as the record date. In other words, this is a cut-off date for bonus issue and investors must continue to be shareholders on the record date to be eligible to receive the bonus issue.

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are the company's accumulated earnings which are not given out in the form of dividends but are converted into free shares.

While it seems that the promoters are only trying to evade what’s written on the walls, let’s look at how an investor is going to benefit from the bonus issue.

To understand this better, we need to go back to the time of IPO launch.

• IPO price band ? 1,085 to ? 1,125 per share
• Lot size of 12 shares

Mr. A got subscription of 5 lots (60 shares) @ ? 1,125 per share.

On record date (11th of November), Mr. A becomes eligible for 5:1 bonus issue as per the latest corporate action. This means that for every 1 share that Mr. A holds, he will get 5 shares. So, his total holding will now become 360 shares.

The market price of a share adjusts itself against the issuance of bonus shares. In the case of Nykaa, the price is going to fall by one-fifth and its going to trade at a market price of close to ? 200. Retail investors will probably get enough motivation and reason to catch a falling knife. This gives the management another good reason to consider bonus issuance.

Now let’s see the net result for Mr. A when the shares are being sold. It is to be noted that the cost of acquisition of shares at the time of IPO will remain unchanged and if in case Mr. A sells the shares at a price lower than the IPO price, he is going to incur loss. Considering the current scenario, it seems an investor will observe capital erosion to the extent of ~80% of initial investment.

The bonus shares don’t have a cost of acquisition as this is given to the shareholders as a reward. Now if the shareholder sells the shares within a period of one year of receipt, he is subjected to short term capital gains tax at 15%. This in turn reduces the receipt from sale of bonus issue.

This is a simple calculation excluding surcharge and other taxes levied at the time of sale (stamp duty, securities transaction tax etc) but it gives a fair picture of how the investor is actually going to benefit from the offer.

???????The bonus offer and its timing doesn’t sound lucrative for investors and at the same time it doesn’t demonstrate prudence on the promoter’s part. This event will be marked as a case study of corporate governance and how retail participants are misled.

?Disclaimer - The views expressed in this article are of the author and do not represent the firm’s views.