The promoters of large and mid-cap companies plan to sub-divide company's share face value following a sharp rise in stock prices in the last one year.
The board of directors of five companies – Mahindra & Mahindra, Unity Infraprojects, Suprajit Engineering, KLG Systel and India Securities will meet this week to consider the sub-division of paid-up value of their company's equity shares.
The market price of these five companies has appreciated by more than 200% from their March 9, 2009 levels, while the Bombay Stock Exchange (BSE), Sensex gained 107%.
Typically, in a stock split, the face value of the company's share is sub-divided into smaller denominations. This makes even high priced shares accessible to small investors. In most of the cases retail investors stay away from those stocks, when share prices surge to high levels and that reflects into fall in the number trades and volumes.
Stock splits increases the number of outstanding shares and creates a wider and more active market for a company's shares. Basically, it is only an accounting entry and there would be no cash flowing in or out of the company.
Mahindra and Mahindra, the utility and tractor major said that its board will meet on January 25 to consider a stock split. The stock having a face value of Rs 10 each has appreciated by 256% to Rs 1,131.59 on January 22, 2010 from Rs 317.60 on March 9. The trading volume on the counter is almost halved to average one million shares in current month, as compared to average two million shares a year ago.
Since a split results in the market price falling immediately in the ratio of the split, the liquidity in the shares improves, thus opening the way for further appreciation in the stock price.
In current month alone, the promoters of eleven companies have proposed the sub-division of their company's equity shares into lower denomination to increase the liquidity into market.
Ipca Laboratories, Atco Corporation, Murli Industries and SE Investments already approved stock split its Rs 10 paid-up share into five shares of paid up value Rs 2 each. Sterlite Technologies sub divided its equity shares into Rs 2 paid up from Rs 5 and Basant Agro to Re 1 from Rs 10 paid-up.
