6B Case Study 1
6B Case Study 1
Case Study
ABC Ltd. is a global leader in technology services and consulting. It has enable clients in
45 countries to create and execute strategies for their digital transformation. From
engineering to application development, knowledge management and business process
management, it helps their clients find the right problems to solve, and to solve these
effectively. Their team of 198,000+ innovators, across the globe, is differentiated by the
imagination, knowledge and experience, across industries and technologies that they
bring to every project they undertake.
Today, businesses operate in an unprecedentedly fluid environment. The technology
landscape is turning highly complex as it evolves to meet the demands of a competitive
marketplace and an experiential economy. At the same time, customers are increasingly
demanding simple, new, and convenient experiences.
ABC Consulting helps global corporations - in over 20 countries - develop unique
solutions to address their complex business challenges and create value through
sustainable innovation. As pragmatic consultants with an eye on execution, they help you
design and achieve market-leading performance roadmaps by combining creative thinking,
technology expertise, and global reach.
1. Details of Bonus Issue
The Company has allotted 1, 14, 84,72,332 fully paid-up equity shares of face value ` 5
each in June 2015 to the shareholders of the Company in proportion of 1:1 and
consequently, the number of shares increased from 1,14,84,72,332 to 2,29,69,44,664.
The Company allotted 57,42,36,166 fully paid up equity shares of face value ` 5 each in
December 2014 to the shareholders of the Company in proportion of 1:1 and
consequently, the number of shares increased from 57,42,36,166 to 1,14, 84,72,332.
It was on October 10, 2014, that the company had recommended a bonus issue of one
equity share for every equity share held (1:1 bonus issue).
It fixed December 3, 2014, as the record date for the purpose of allotment of bonus
shares / stock dividend.
The company has mentioned in the Board of Directors report that sufficient cash balance
has been kept by the company to meet its strategic objectives. The company presently
generates sufficient cash internally to finance all its operational, financing and investment
requirements.
Exhibit – 2
Exhibit 4
Category of Shareholder No. of shares at No. of shares at % of total No. of shares at the No. of shares at % of total % change
the beginning the beginning shares at the end (Demat) the end shares at during the
(Demat) (Physical) beginning (Physical) the end year at the
end
(A) Promoter and
Promoter group
Indian 15,02,15,636 13.11 29,28,06,199 12.77 (0.34)
Information regarding Share Prices at two leading Stock Exchanges - ESB and ESN for the month of June, 2015
(i) ESB:
Close
Price Date Open Price High Price Low Price Trade Value Number Of Trades Traded Quantity
Price
Graphs of Prices of shares during the month of June 2015 at two leading Stock Exchange of India
2000 2000
1500 1500
1000 1000
500 500
0 0
International Perspective
Stock dividend of one ADS for every ADS held has been given. ABC Ltd. shares
are also listed on the New York Stock Exchange (NYSE). The detail structure of
the company’s share prices in NYSE for the month of June, 2015 has been given
as below:
Price Date Open Price High Price Low Price Close Price
1-6-2015 31.97 32.38 31.93 32.21
2-6-2015 31.76 31.88 31.56 31.82
3-6-2015 31.88 32.44 31.76 32.1
4-6-2015 31.83 31.98 31.41 31.65
5-6-2015 31.53 31.91 31.52 31.81
8-6-2015 31.53 31.62 31.46 31.52
9-6-2015 31.32 31.41 31.03 31.11
10-6-2015 31.59 31.81 31.45 31.72
11-6-2015 31.13 31.47 31.01 31.25
12-6-2015 30.66 31.05 30.59 31.02
15-06-2015 30.79 31.32 30.72 31.25
16-06-2015 31.15 31.91 31.15 31.84
17-06-2015 31.45 31.93 31.45 31.92
18-06-2015 31.86 32.42 31.86 32.17
19-06-2015 32.05 32.16 31.86 31.9
22-06-2015 32.38 32.72 32.25 32.53
23-06-2015 32.32 32.5 32.19 32.22
24-06-2015 31.96 32.18 31.48 31.52
25-06-2015 15.9 16.28 15.89 16.13
26-06-2015 16.26 16.31 16.11 16.17
29-06-2015 15.91 15.98 15.81 15.86
30-06-2015 15.94 15.97 15.66 15.85
(i) The total number of subscribed shares of ABC Ltd. in November 2014 is
57,42,36,166 fully paid equity shares.
(ii)
From the above data and the given exhibit, it can be seen that arbitrage opportunity is not
possible in the domestic market. However, there is an arbitrage opportunity if domestic
investors can purchase shares after the date of bonus issue declaration and sell their shares
in the international market later after some days.
(iii) After the bonus announcement, the investors have not reacted positively. The shares are
down by about ` 120 to ` 2001 levels now. The reasons for this may be because the
company has pile up excess cash and it has not enough investment opportunities.
(iv) After the bonus issue, EPS will reduce. The reason is that after the bonus issue, the number
of shares will increase leading to increase in denominator while numerator i.e. Profit after
tax is same. This leads to fall in the value of EPS.
(v) (a) As per regulation 95 of SEBI (ICDR) Regulation, 2009, if an issuer after the approval
of its board of directors which does not require the shareholders’ approval for bonus
issue shall implement the bonus issue within fifteen days from the date of approval
of the issue by its board of directors.
However, where the issuer is required to seek shareholders’ approval for bonus
issue, the bonus issue shall be implemented within two months from the date of the
meeting of its board of directors wherein the decision to announce the bonus issue
was taken subject to shareholders’ approval.
(b) While calculating basic earnings per share, profit after tax after preference dividend
is divided by the total number of equity shares outstanding. On the other hand, in
the computation of diluted earnings per share, debt which can be converted into
However, since ABC Ltd. is a debt free company, the above provision is not
applicable to it.
(c) It is clearly provided in the SEBI Regulations that once the decision to make a bonus
issue is announced, the issue cannot be withdrawn.
(vi) Prices of ABC Ltd. on the Ex-Bonus date has been reduced drastically. The basic reason is
that after the bonus issue, the prices of shares come down in the immediate period. For
instance, if the share price before bonus issue is Rs. 1000 and the company issues bonus
shares in the ratio of 1:1, the share price after the bonus issue will be Rs. 500. However, it
also means that the total market value (2 shares x Rs. 500 = 1000) remains the same.
(vii) It is generally considered prudent to pay dividend consistently even after the bonus issue.
Higher dividend payout on the part of ABC Ltd. indicates that existing shareholders will get
more dividend after the bonus issue.
For example, in the given case, the company issues bonus shares in the ratio of 1: 1. It
declared dividend of 10% which will be ` 1 on the face value of ` 10 in the previous year. In
the current year, it decides to maintain the dividend at 10%. Now, a shareholder with one
share will get an additional share. His total shares will be 2. And, he is eligible for total
dividend of ` 2 (` 1 x 2 shares). So, his dividend income will be doubled due to issue of
bonus shares.
Therefore, higher dividend payout on the part of ABC Ltd indicates willingness on the part of
company to keep the shareholders happy and increase their wealth. Also, the company can
utilize it’s excess cash reserves in this way.
(viii) It is definitely feasible for the company to go for buyback. As it has been given in the exhibit
1 that company’s cash reserves has increased from 27,722 in 2015 to 29,176 in 2016. So,
the company’s burgeoning cash reserves can be utilized for buyback.
(a) A company may buy-back its shares or other specified securities by any one of the
following methods:—
However, it is to be noted that no offer of buy-back for fifteen per cent or more of the
paid up capital and free reserves of the company shall be made from the open
market.
(b) A company shall not buy-back its shares or other specified securities from any
person through negotiated deals, whether on or of the stock exchange or through
spot transactions or through any private arrangement.
(c) Any person or an insider shall not deal in securities of the company on the basis of
unpublished information relating to buy-back of shares or other specified Securities
of the company.
(d) A company shall not make any offer of buy-back within a period of one year reckoned
from the date of closure of the preceding offer of buy-back, if any.
(ix) The Market Price (MP) just before and after the ex-bonus date on both the stock exchanges
and calculation of Price Earnings Ratio (P/E) ratio is as follows:
ESB
ESN
ESB
ESN
(x) The company is debt free as it can be observed from the Balance Sheet of the company.
The reason for such non debt element in the capital structure of the company may be due to
the fact company has large cash reserved which can be utilized for short term working capital
requirements of the company. Further, the exclusion of debt in the capital structure reduces
the periodic interest cost on the part of the company. Also, there is the possibility of default
risk which may arise due to non-payment of interest and principal amount of loan.
(xi) As it has been given in the case study itself sufficient cash balance has been kept by the
company to meet its strategic objectives. The company presently generates sufficient cash
internally to finance all its operational, financing and investment requirements.
2015 2016
= 49.01% = 49.67%
2015 2016
= 49.8% = 52.2
2015 2016
= 0.80 = 1.30
(d) Net Profit Ratio = Net Profit after tax(Standalone)/Net Sales x 100
2015 2016
= 29.24 = 25.71
(i) (a)
(ii) (b)
(iii) (d)
(iv) (b)
(v) (c)
(vi) (a)