SEBI should mandate a common face value for shares and end the confusion in the minds of investors.
The recent circular issued by Securities and Exchange Board of India (SEBI) relating to the amendment to the Equity Listing Agreement mandates, inter alia, that “listed companies shall declare their dividend on as per share basis only”, as it “is expected to bring uniformity in the manner of declaring dividend amongst the listed companies”. The circular issued under Section 11 (1) of the SEBI Act “to protect the interest of investors in securities and to promote the development of, and to regulate the securities market” has, viewed against the prevalent position relating to the face value of shares, only added to the confusion already prevalent with regard to the dividends that companies are declaring.
Recalling history
It needs to be recalled that a large number of companies used to have varying face values. For example, a number of companies based in Ahmedabad used to have a face value of Rs 125 while the face value of Tata Steel used to be Rs 75. The Ministry of Finance, therefore issued in February 1981 a guideline that denomination of equity shares be fixed uniformly at Rs 10 and that the denomination of the then existing shares other than Rs 10 be converted into denomination of Rs 10. In January 1983, it was, however, clarified that denomination of shares of Rs 100 need not be changed to denomination of Rs 10. In other words, shares of all companies were required to be in denominations of Rs 10 or Rs 100 only. Ever so, several companies converted the denomination of shares of Rs 100 into that of Rs 10 on the ground that it generated better liquidity, as also a higher value for the shares.
Confusion amplified
In 1999, SEBI was contemplating the question of doing away completely with the denomination of shares. Instead, a company would have at any point of time the notified number of shares, which would be altered only in relation to issue of bonus or right shares; ESOPs and conversion of debentures or warrants, as is the practice followed in the United States. Instead, in a strange decision, SEBI decided “with the objective of broadening the investors’ base” to dispense with the requirement of standard denomination of Rs 100 or Rs 10 and give freedom to companies to issue shares of any denomination but not below Re 1. Companies which have issued shares of the face of Rs 10 or Rs 100 were also permitted to avail of this facility by consolidation or splitting their existing shares.
As a result of the above decision, not only a number of companies coming out with IPOs issued shares in denominations other Rs 10 and Re 1, mainly in denominations of Rs 2, Rs 4 and Rs 5, but a number of existing listed companies having denomination of Rs 10 have split their shares mainly into denominations of Re 1, Rs 2 or Rs 5, and those with a denomination of Rs 5 into Re 1, for no rhyme or reason. One appreciates this if the price of the share is above say Rs 1,000 and not otherwise. Merchant bankers, who had a heyday, were mainly responsible for this.
Such splitting has only added to the confusion of investors. One could hear several investors lamenting that the prices of their shares have fallen, while in actuality prices have reason due to splitting of shares arising out of a reduction in the face value of shares.
More From This Section
Need of the hour
Declaring dividend on per share basis as mandated by SEBI will add to the existing confusion of investors, many of whom do not understand fully the complexities of stock market operations. Companies with their shares in denominations of say Re 1, Rs 2, Rs 3, Rs 4 and Rs 5 and Rs 10 declaring dividend of say Re 1 per share would actually be declaring dividend of 100 per cent, 50 per cent, 33.33 per cent, 25 per cent, 20 per cent and 10 per cent, respectively. One wonders how many investors would actually readily know the percentage of dividend declared if it is in terms of per share only. In fact, several of the brokers would also not be able to give a ready answer, as it is just not possible to keep a track of the face value of thousands of share traded day in and day out.
A joint meeting of the Primary and Secondary Market Advisory Committees of SEBI held about a year ago recommended that all companies, present and future, should have shares in denomination of Re 1 only. SEBI has yet to issue a circular in this behalf. With the amendment requiring companies to declare dividends on per share basis only, SEBI should also issue a circular mandating denomination of shares to be only in Re 1 and end this bedlam haunting the investors for nearly a decade.
The author is former executive director, Bombay Stock Exchange