In the span of a week in April, three of India's four largest software companies, Infosys Technologies, Tata Consultancy Services (TCS) and Satyam Computer Services announced bonus issues, all in the ratio 1:1 (investors get one share for every one held). For Infosys, it was the company's fifth bonus issue since August 1994. The total number of shares of the company will now increase from 275.5 million to 551 million. TCS' maiden bonus issue will see the number of its shares double to 978.6 million. And Satyam's second bonus (its first was in August 1999) will see the number of its shares also double, to 648.8 million. Indeed, apart from a lull during the tech meltdown (the early 2000s), Infosys and Wipro have declared a bonus every two, three years.

Now, the thing about bonus issues is that they don't always mean good news for investors. A bonus issue dilutes the equity of the company and could result in a decline in earnings per share (EPS), unless earnings grow fast, really fast. And a decline in EPS could hurt the valuation of a company, causing a fall in its share price.

Thus far, Indian it firms haven't disappointed investors. And these recent announcements of a bonus issue, explains R. Rajagopal, Vice President (Equity Investment), IDBI Capital Market, aren't merely efforts to reward shareholders, but reflect a confidence among these companies that they have "the ability to serve the expanded equity". He adds that companies such as Infosys have done just this (read: managed to maintain or grow EPS on an expanded equity). "There is more to come from the top-tier software firms," he sums up. If the man is right (and he probably is), that would mean the Indian software services story, which has seen the stock price of Infosys increase some 117 times and that of Wipro, some 154 times since 1997, is far from over.

That's an opinion that is seconded by Gurunath Mudlapur, Managing Director, Atherstone Institute of Research. "With (Indian) software firms getting into the fray (solo) for acquiring big deals, this could just be the beginning," he says.

Companies also declare a bonus to increase the liquidity of a stock (when it becomes too high-priced, it becomes illiquid). While the software firms do not face this problem -"The top guys are not doing it to attract investors," says Rajagopal, implying that this is something they do anyway-bonus issues do make a stock more affordable, and attract investors who may have otherwise balked at high prices. "Bonuses bring liquidity to a stock following the broadening of investors' base, due to the affordability of the stock," says Mudlapur.

The risk of declining EPS, however, is something investors are aware of, and they haven't been loath to punish those companies whose bonus issues could lead to this. For instance, Satyam's stock fell some 8 per cent following the company's announcement of a bonus. Reason: a muted guidance by the company. In contrast, the stocks of Infosys and TCS reacted positively to the announcement of a bonus following impressive earnings forecasts by the two companies.