The Other Freebies: How Companies Attract Shareholders with Rewards

Discounts make people happy. That’s why we’re inundated with special offers and deep discounts on everything from clothes to gadgets every festive season. Discounts also make businesses happy, as they help increase sales for a large number of brands.

These discounts, however, are not limited to consumers alone. Some companies offer shareholders coupons on their products or goodies from time to time. Take the case of Ugar Sugar Works Ltd: it sends 1 kg of sugar with its annual report to all its shareholders. So technically if you were to buy even a single stock of Ugar sugar, currently priced at around 68, you gain a kilo of sugar 55-65 for free.

India’s largest company by market capitalization, Reliance Industries Ltd (RIL), has offered its shareholders a 15% discount on inpatient services at Reliance Foundation Hospital in Mumbai. This earns them, for example, a discount of 7,500 on a hospital bill of 50,000. Thus, the discount offered there is three times the price of a single RIL stock.

Companies such as Raymond Ltd, Hawkins Cookers Ltd, Bata India Ltd and Titan Ltd are known to provide discount coupons in the range of 10-30% to shareholders. These freebies are usually given during festival seasons when businesses see an increase in sales.

By offering such discounts, companies also aim to attract and acquire new customers as well as retain them.

“While we are seeing innovation at breakneck speed, many companies don’t believe in ‘reinventing the wheel’ and come up with their own versions of best-selling products. How do you differentiate yourself from your competitors in such cases? One way is to offer new products or services every few months which is bound to affect your cash flow and revenue.The other is to offer discounts where you can attract new customers and reward existing customers said Sumit Chanda, managing director of Jarvis Invest, an artificial intelligence-based equity adviser.

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Experts believe that other means of rewarding shareholders, such as buying back shares and paying dividends, have relatively higher leverage to attract investors.

“These investors prefer consistent cash flow and they believe a company that pays regular dividends is a company that has a strong business model and a profitable business,” Chanda said.

When it comes to stock buybacks, the class of investors is generally different from those looking for regular dividends. This is more of a short-term phenomenon and multiple variables affecting it, the most important being the redemption price. There have been instances where it has worked and in some cases failed.

Investors should note that certain rewards such as the payment of dividends may be taxable in their hands. However, rewards such as coupons are not taxable. “Such benefits or perquisites, in the form of discounts, from one person to another could be taxable under two sections of the Income Tax Act. The first is Article 28 (business or professional income) and Article 56 (income from other sources). Where such advantages have no connection with the business or profession of the recipient, they could not be taxable under Article 28. Taxation under Article 56 may also not arise because rebates are not covered in the exclusive sense of personal property,” Naveen said. Wadhwa, Deputy Managing Director, Taxmann.

Do discount coupons influence investor decisions in any way? Shah says they influence investors’ buying behavior to a very limited extent.

Separately, experts suggest that factors such as company fundamentals, price performance, shareholding structure and industry potential, not discounts, should drive reasons for purchase. shares of a company.

Harshad Chetanwala, Sebi-registered investment adviser and co-founder of MyWealthGrowth, said: “Companies offering gifts or discounts to shareholders should be viewed from a goodwill gesture perspective and never be the factor for invest in it. The company’s fundamentals and growth prospects are more important catalysts than these gestures.”

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