Stock split is one of the strategic financial decision that acts as a signaling device to the investors. This article discusses several crucial issues pertaining to stock splits.
Splits
were at best an occasional feature in the Indian Market.
It began in March 1999, when SEBI allowed companies to set
the face value of their shares as long as it was not fractional.
The SEBI ruling superseded the 1983 government circular
banning companies from issuing shares at face value other
than Rs. 10 or Rs. 100. Prior to this, it was felt that
frequent changes in face value of scrip would confuse investors,
especially with some companies changing the face value of
their scrip repeatedly. For example, the Bombay Burmah scrip
had a face value of Rs. 125 till 1963. It changed to Rs.
25 from 1963 till 1984, when it became Rs. 100 for the next
ten years. Since 1995, it has been Rs. 10. The trend was
to reduce the face values to smaller amounts.
Against
this backdrop, this paper aims at explaining the basic concept
of split, the reasons behind it and its implications. The
rest of the article is organized as follows. Section 2 discusses
the conceptual issues of stock split. Section 3 covers the
reasons behind stock split and its implications. Limitations
of stock split are discussed under Section 4. Section 5
covers the regulatory framework of stock splits in India.
Abuse of stock split in Indian market context is discussed
under Section 6 and Section 7 covers SEBI initiatives to
curb abuse of stock split. The last Section gives concluding
observations.
A
stock split simply involves a company altering the number
of its shares outstanding and proportionately adjusting
the face value of each share. The balance sheet items remain
same except that the total number of outstanding shares
of the company increases proportionately to the ratio of
split. After a two for one split each shareholder has twice
as many shares, but each represents a claim on only half
as much of the corporation's assets and earnings.
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