The Rs 800-crore engineering company, Nesco, has cancelled its 1:10 stock split announced in November 2010. Following the official announcement of cancellation made in a notice to the exchanges, the share price of the company crashed nearly 7 per cent intra-day on the Bombay Stock Exchange and the National Stock Exchange on Wednesday.
Since the announcement of the stock split, the company’s market cap had witnessed a sharp rise of 25 per cent or Rs 202 crore — a four-year high. The stock was last traded at Rs 630.2, down 4.84 per cent, on BSE and Rs 632, down 4.6 per cent, on NSE. The stock had seen an up move from Rs 575 in November last year.
Generally, when a stock split is announced by a company, the stock witnesses a spike. This is due to a perception among retail investors that a stock split attracts new investors, as more stocks can be purchased at a cheap price.
When contacted, Sumant Patel, chairman, NESCO, said over the phone, “The board does not feel the time is right for a stock split. In the past too, we have discussed the issue several times but did not take any decision. Maybe some of the wording in one of the notices to the exchange has not been properly put.”
Prithvi Haldia of Prima Database said, “The Securities and Exchange Board of India (Sebi) had banned stock splits in primary markets some eight years ago when I had raised the issue. In the current scenario, when shares are available in electronic form, there is no logic for a stock split, as it does not bring any change in the company’s fundamentals or balance sheet or anything else. There is nothing called proper timing for a stock split.”
Recommendations have already been made to Sebi for banning stock splits in the secondary markets as some companies use them to lure customers and dump their shares in the market. Sebi, however, is yet to act on the matter. Patel also said while the stock split was approved by the board in November and stock exchanges were informed, another notice was issued on December 28, 2010.
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The notice said, “The company (Nesco) has now decided to put up the said matter (stock split) again in the next board meeting and finalise the decision. Hence, the company has not started with any procedure towards the sub-division of face value of its equity shares. Further, the company will inform as soon as the board of directors takes a final decision on the said subject in the next board meeting.”
However, the company made it clear only on Wednesday that the stock split was cancelled. When contacted through email, Nesco did not respond as to why the company had taken so much time to announce the cancellation. In a reply, it just repeated that the stock split was cancelled.
Nesco’s website says the company was established in April 1939 and continues to be a leading provider of equipment to Indian Railways, numerous ordnance factories and forging plants. Nesco has shown a net profit of Rs 21 crore and revenue of Rs 40 crore for the quarter ended March 2011. Its financial year 2010-2011 profit stood at Rs 68.52 crore on a revenue of Rs 144 crore.