The other freebies: How companies lure shareholders with rewards

Such discounts, though, are not just limited to consumers. Some companies offer shareholders discount coupons on their products or goodies from time to time. Take the case of Ugar Sugar Works Ltd: It sends 1kg of sugar along 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 get a kilo of sugar worth ₹55-65 for free.

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India’s biggest company by market capitalization Reliance Industries Ltd (RIL) has offered a 15% discount on in-patient services at the Reliance Foundation Hospital, Mumbai, to its shareholders. That, for instance, entails them a discount of ₹7,500 on a hospital bill of ₹50,000. So, the discount offered therein is three times the price of a single stock of RIL.

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. Such freebies are generally offered during festival seasons when companies see an uptick in sales.

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

“While we are witnessing innovations at a breakneck speed, there are many companies which don’t believe in “reinventing the wheel” and come up with their own versions of best-selling products. How do you differentiate from your competition in such cases? One solution is to come up with new products or services every few months, which is bound to affect your cash flows and income. The other is to offer discounts where you can attract new clients and reward the existing ones,” said Sumit Chanda, chief executive officer of Jarvis Invest, an artificial intelligence-based equity advisor.

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Experts believe that other ways of rewarding shareholders such as share buyback and dividend payout have relatively higher influencing power to attract investors.

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

As far as share buyback is concerned, the investor category is usually different from those looking at regular dividends. It is more of a short-term phenomenon and has multiple variables affecting it—the most important being the buyback price. There have been instances where it has worked and, in some cases, failed.

Investors should note that the certain rewards such as dividend payout may be taxable in their hands. However, rewards such as discount coupons are not taxable. “Such benefits or perquisites, in the form of discounts, flowing one person to another could be taxable under two sections of the Income-Tax Act. The first is section 28 (business or professional income) and section 56 (income from other sources). Where such benefits have no nexus with the business or profession of the recipient, it could not be taxable under section 28. The taxability under section 56 may also not arise because the discounts are not covered within the exclusive meaning of movable properties,” said Naveen Wadhwa, deputy general manager, Taxmann.

Do discount coupons influence investors’ decisions in any way? Mitul Shah, head of research at Reliance Securities, says they influence the buying behaviour of investors to a very limited extent.

Separately, experts suggest that factors such as company fundamentals, price performance, shareholder pattern and industry potential, and not discounts, should determine the reasons for buying a company’s stock.

Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth, said, “Companies giving goodies or discounts to shareholders should be looked at from a goodwill gesture perspective and never be the factor for investing in it. The fundamentals and growth prospects of the company are more important catalysts than these gestures.”

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