India Inc lines up for stock splits

With the stock market on a roll since May last year,share prices have moved up and it won’t be surprising if more companies follow suit and decide they want smaller denominations for their stocks. Last year,close to 90 companies,including Bharti Airtel and Mahindra & Mahindra,opted for a stock split,while in 2008-09,the number was smaller at 66.

Recently,Sebi is understood to have dropped a proposal to impose a uniform Re 1 face for shares as it felt the dividend is in any case distributed on a per share basis. As HDFC vice-chairman and CEO Keki Mistry pointed out at the time of the home loan major’s decision to split the stock,“The idea is to increase the retail shareholding. Typically,retail shareholders like to invest around Rs 10,000 or Rs 20,000 in a stock and their mindset is such that they like to buy at least 10 shares. The stock split will help them do this.” Earlier in August 1999,HDFC had reduced the face value of its stock from Rs 100 to Rs 10.

Like HDFC,other companies too believe a smaller denomination will encourage more retail investors to own the stock. Companies that recently went for sub-division of shares are getting a positive response on the bourses. Usually,a split spurs demand for a scrip,besides improving its liquidity and increasing the outstanding shares.

What Mistry says is true. At Rs 2,800 levels,the price does seem intimidating for small investors and discourages them from buying. That,in turn,means smaller volumes. As Birla SunLife CEO A Balasubramaniam points out,“Stock splits help improve trading volumes in the counter.” Among the public sector stocks,Engineers India reduced the par value of its shares.

Since the Manhohan Singh government came to power at the Centre the first time in 2003,the Indian stock markets haven’t looked back. The Sensex,from its sub-5,000 levels,has soared all the way to 20,000-plus levels and currently rules at just under 17,000. Despite its roller-coaster ride — the benchmark index fell to 8,000-levels in 2008 October — companies have decidedly split their stocks when they believed the price was out of reach for smaller investors. Stock splits usually benefit retail investors by making shares more affordable,but it’s only over a slightly longer time frame that shareholders get the benefits of stock splits because the price in the market immediately adjusts to the new par value. Here’s what happened for M&M,which was priced at Rs 1077.70 on March 26,2010. It announced a 2-for-1 stock split on March 29. If an investor owned 100 shares of M&M before the split worth Rs 1,07,770,he got 200 shares worth Rs 1,10,670 after the split. The Rs 1077.70 per share became Rs 553.35 per share.