How to lose money by selling the bonus shares of Nykaa

If you are holding Nykaa shares and are exited about the recent bonus issue, think again. If you are one of those who invested in the IPO of Nykaa and have just got the bonus allotment, you may be in for a nasty surprise. Yes, it is going to be a case of losing it both ways. You will make a huge capital loss on the originally allotted shares. At the same time you will make a smart gain on the bonus shares. The problem is that these losses on the original IPO shares cannot be written off against the gains you make on the bonus shares. Thus, it will be a double loss for such IPO investors. Here is how you can lose money.

At the close of 15th November, the stock of Nykaa has closed at Rs192.50. But, before we get into these specifics, let us spend a moment on the bonus issue and the way bonus shares are taxed. Nykaa has declared a bonus of 5:1 i.e. investors will get 5 bonus shares of Nykaa for every share held. If you had been allotted 100 shares of Nykaa in the IPO at Rs1,125 per share, you would be holding 600 shares at an average cost of Rs187.60. Now the tax part. Post bonus, the capital gains are calculated as usual for the base number of shares but in case of bonus shares, the cost of acquisition is deemed to be zero.

That creates a problem for investors and here is why. For instance, on the 100 shares originally allotted to you, there is a notional loss of Rs932.50 (1,125.00 – 192.50). Since these shares are held for more than 1 year, it will be a long term capital loss of Rs93,250. In the case of bonus shares, the cost of acquisition is zero. So on the entire notional gains of Rs192.50, tax is payable on 500 shares. That works out to a short term capital gain of Rs96,250. Now, this short term capital gain will attract tax at 15%, but long term losses cannot be written off against short term gains, so the investor loses both ways.

For the average retail investor who had bought in the IPO and held on for a year in the hope of paying lower tax on capital gains, it is going to be a case of heads I lose and tails I don’t win. Perhaps, the bonus is intended to reduce the heavy selling that normally accompanies the end of one year. There is one more challenge that many investors are facing. Due to the last minute change in the record date for the bonus, many investors were left in the lurch where the stock had gone ex-bonus but the bonus shares had not been credited. Clearly, that is food for though for the regulators. However, for now, the retail investors are not having a very happy time with Nykaa. Their long wait has almost been unfruitful.