Even as companies rush to mop funds from the primary and secondary markets, there is an allied trend. Stock splits and bonus issues have picked up in the past six months, data compiled by the Business Standard Research Bureau shows.
From April to now, 69 stock splits and 58 bonus issues have happened across sectors, almost double the number for the same period last year, when these were 38 and 30, respectively. In the entire financial year of 2009-10, the number of stocks splits and bonus issues were 82 and 62, respectively, only marginally more than this year’s total till now.
“During a bull run, a lot of mid-cap and small-cap stocks are chased by retail investors and market operators. Typically, retail investors chase price and not value. The idea of doing a stock split is to make it affordable to them,” says Prithvi Haldea, chairman and managing director, Prime Database. “A bonus issue, on the other hand, utilises the reserves a company has. The idea, again, is to reward shareholders,” he says.
Typically, both stock splits and bonus issues increase the number of shares outstanding. This is done by issuing more shares to existing shareholders without impacting market capitalisation of the company undertaking the exercise.
| BULLISH | ||
| Year | Stock Split | Bonus Issue |
| Apr-Oct ‘10* | 69 | 58 |
| Apr-Oct ‘09 | 38 | 30 |
| Apr ‘09-Mar ‘10 | 82 | 62 |
| *Data upto October 10 Source: BS Research | ||
The interest from small and mid-cap firms in this exercise is not difficult to guage, say experts. The sectoral indices — BSE Mid-Cap and BSE Small-Cap — have outperformed the Sensex in the past six months by 22.7 per cent and 25.3 per cent, respectively. This is obviously driving them to take up the two with gusto, they say.
Stock splits, in particular, have found most favour with small and mid-cap firms, though there are notable exceptions such as Britannia Industries, Emami, Lupin, Sterlite and Housing Development Finance Corporation, which undertook stock splits recently to increase liquidity in their respective counters.
Take Britannia. When the Rs 3,416-crore biscuit major undertook a 5:1 stock split on September 8, it was trading in the region of Rs 2,118 per share (BSE closing price on September 7). The market capitalisation was Rs 5,065 crore. The resultant split brought down the value of the share by five times, to Rs 424. But the stock opened higher on September 8, at Rs 431 per share, hitting a high of 534 on September 9. Since then, there has been a correction, with the stock hovering in the Rs 430-490 belt. But the resultant market capitalisation has increased to over Rs 5,300 crore (figure arrived at after taking into account Britannia’s closing price of Rs 443.15 yesterday on the BSE).
“A bull run typically increases the share price to unaffordable levels for the retail investor. A stock split or bonus issue helps increase the shareholder base, thereby increasing market participation,” says Harish Vasudevan, an equity research analyst at Mumbai-based brokerage SVS Securities. This point is corroborated by Narayan K Seshadri, former head of the consulting practice at Arthur Andersen and KPMG, who now run a management consultancy called Halcyon Resources & Management in Mumbai. “It is not only important to list; you also need trading volumes. Stock splits and bonus issues allow you to do that, with the share price trading at an affordable level. This way, volumes increase,” he says.
Britannia’s combined average of traded volumes across the two exchanges of BSE and NSE since the stock split, for instance, has been 286,000 shares, while a month before, the combined average was 63,142 shares only.