How Nykaa’s Genius Financial Strategy Backfired? : Nykaa Business case study

Summary

The video explores Nika's journey from a successful e-commerce startup to a publicly listed company, focusing on the strategic use of bonus shares to manage stock price volatility. After an IPO surge, Nika's stock plummeted, leading to the issuance of 5:1 bonus shares to minimize the impact of capital gains taxes on pre-IPO investors. This move aimed to stabilize the stock price and prevent market flooding by large investors. The video delves into the complexities of IPO funding, tax strategies, and the ethical dilemmas of such financial maneuvers, offering valuable lessons for business students and investors.

Takeaways

• 😀 Nika became one of India's most profitable startups, with a rapid rise to unicorn status in 2020, but its stock price has since fallen over 60% from its post-IPO peak.
• 😀 Nika's IPO in 2021 was highly anticipated, as it was the only profitable e-commerce company at the time. However, its stock price faced a significant drop after its listing.
• 😀 Institutional investors, who had invested in Nika at lower valuations, used the IPO as an exit strategy to book substantial profits, but the stock price fell after their lock-in period ended.
• 😀 Nika’s finance team implemented a bonus share strategy (5:1 ratio) to reduce market volatility by increasing the number of shares in circulation, thus helping stabilize the stock price.
• 😀 The bonus share issue led to a tax advantage for investors, as bonus shares are considered 'free' and thus incur lower capital gains tax when sold, effectively lowering their tax liability.
• 😀 The issuance of bonus shares (5:1) diluted the value of Nika’s stock but ensured that pre-IPO investors couldn't flood the market with large sell-offs immediately after the lock-in period.
• 😀 Capital gains tax on bonus shares is treated differently than on regular shares, incentivizing investors to hold their shares longer, thus preventing a mass sell-off and further stock depreciation.
• 😀 Pre-IPO investors, despite the short-term price drop, were able to lock in profits from the bonus shares, which minimized their tax burden and delayed their exit strategy.
• 😀 The bonus share strategy aimed to avoid a drop in Nika's stock price due to the large volume of shares that pre-IPO investors wanted to sell once the lock-in period ended.
• 😀 This strategy drew mixed reactions—some hailed it as a smart move to protect investors, while others criticized it for potentially manipulating the stock price and questioning corporate governance.
• 😀 The case study of Nika illustrates the complexities of startup funding, IPO strategies, tax laws, and market behavior, offering important lessons for business students on managing investor expectations and market volatility.

Q & A

What is the significance of Nika's IPO in the Indian market?

Nika's IPO was significant because it became one of the few profitable startups to go public in India, which is rare for tech companies. It was highly anticipated and marked a milestone as a woman-led enterprise. However, despite the initial success, its stock price later dropped significantly due to falling profits and market sentiment.

What happened to Nika's stock price after it was listed?

After Nika's IPO, its stock price peaked at ₹2570, but in the following quarters, the stock price dropped by over 60%, falling below the IPO price of ₹1125. This was due to a massive 96% drop in Nika's profits and broader market sentiment against tech stocks.

What are 'bonus shares,' and how did Nika use them to stabilize its stock price?

Bonus shares are additional shares given to existing shareholders, typically at no extra cost. Nika issued a 5:1 bonus share, meaning for every share held, investors received five additional shares. This strategy was aimed at increasing the number of shares available while preventing a sharp drop in stock price after the IPO lock-in period ended.

Why did Nika’s bonus share strategy create controversy among investors?

The bonus share strategy sparked a debate because, while it was legal, many viewed it as a move to protect the company’s stock price and prevent large institutional investors from selling their shares immediately, which could have further depressed the stock. Some considered it a 'corporate governance nightmare' due to its tax implications and perceived manipulation of market behavior.

How do startups raise funding through various rounds of investment?

Startups typically raise capital in stages through rounds such as Series A, B, and C. Each round involves offering a percentage of equity to investors in exchange for funding. Over time, as the company grows, its valuation increases, allowing early investors to see significant returns on their investment.

How does an IPO help early investors in a startup make money?

An IPO allows early investors to sell their shares to the public at a higher price, thus making a return on their initial investment. IPOs act as a 'grand exit' for venture capitalists and angel investors, providing them with liquidity and profits after holding stakes in a startup for years.

What are lock-in periods, and how do they affect IPO investors?

Lock-in periods are restrictions that prevent early investors, like venture capitalists or angel investors, from selling their shares immediately after an IPO. This is intended to avoid a flood of shares entering the market, which could cause the stock price to plummet. The lock-in period usually lasts for 6 to 18 months.

How does the tax treatment of bonus shares differ from regular shares?

Bonus shares are considered to have a 'zero cost' for tax purposes, which means any profit made from selling them is treated as short-term capital gains if sold within one year. However, the original shares, purchased at IPO, have a higher cost basis, and profits from selling them are subject to long-term capital gains tax if held for over a year.

What impact does issuing bonus shares have on an investor’s overall tax liability?

Issuing bonus shares can reduce an investor’s taxable gains on their original shares. Since the bonus shares are considered 'free' for tax purposes, any profit made from selling them is taxed as short-term capital gains, resulting in lower tax liabilities compared to selling the original shares, which could incur long-term capital gains tax.

What lessons can business students learn from Nika’s IPO and bonus share strategy?

Business students can learn several lessons from Nika’s IPO and bonus share strategy, such as the complexities of startup funding, IPO mechanics, the impact of market sentiment on stock prices, and the strategic use of financial tools like bonus shares to manage investor behavior and protect stock price. The case also teaches about ethical considerations in corporate governance and financial strategy.