Other free perks: How companies entice shareholders with rewards

Discounts make people happy. That’s why we are flooded with special offers and huge discounts on everything from apparel to gadgets during every festive season. Discounts also make companies happy, as they help a large number of brands increase sales.

However, such discounts are not limited to consumers only. Some companies offer discount coupons on their products or gifts to shareholders from time to time. Take the case of Ugar Sugar Works Limited: It sends 1 kg of sugar along with its annual report to all its shareholders. So, technically, if you want to buy a single stock of Ugar Sugar, which is currently priced at approx. 68, you get one kilo of sugar 55-65 for free.

Reliance Industries Limited (RIL), India’s largest company by market capitalization, has offered its shareholders a 15% discount on inpatient services at Reliance Foundation Hospital, Mumbai. For example, they get a discount of 7,500 on hospital bills of 50,000 So, the discount allowed is three times the price of a single stock of RIL.

Companies like Raymond Limited, Hawkins Cookers Limited, Bata India Limited and Titan Limited are known to provide discount coupons in the range of 10-30% to the shareholders. Such freebies are usually offered during the festive season, when companies see a boom in sales.

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

“While we are seeing innovations at an alarming pace, there are many companies that do not believe in “reinventing the wheel” and come up with their own versions of the best-selling products. One solution is to come up with new products or services every few months, which is bound to affect your cash flow and income. The other is to offer discounts where you can attract new customers and Existing ones can reward,” said Sumit Chanda, chief executive officer of Jarvis Invest, an artificial intelligence-based equity advisory.

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Experts agree that other methods of rewarding shareholders such as share buybacks and dividend payments have relatively more influential power to attract investors.

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

As far as share buybacks are concerned, the investor category is generally different from those looking for regular dividends. This is a short-term event and there are many variables affecting it- the most important being the buyback price. There are many instances where it has worked and failed in some cases.

Investors should note that some rewards, such as dividend payments, may be taxable in their hands. However, rewards such as discount coupons are not taxable. “Such profits or perquisites, by way of exemption, flowing from one person to another may be taxable under two sections of the Income-tax Act. The first is section 28 (business or business income) and section 56 (income from other sources). Where such profits have no relation to the business or profession of the recipient, it may not be taxable under section 28. Taxability under section 56 may also not arise as exemption does not come under the exclusive meaning of movable properties,” said Naveen Wadhwa, deputy general manager, taxman.

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

Separately, experts suggest that factors such as company fundamentals, price performance, shareholder patterns and industry potential, not discounts, should determine reasons to buy a company’s stock.

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Harshad Chetanwala, SEBI-registered investment advisor and co-founder of MyWealthGrowth, said, “Companies offering gifts or discounts to shareholders should be viewed with goodwill and should never be a factor in investing in these gestures. The company’s fundamentals and growth prospects are the more important catalysts.”

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