Stock splits face rough weather

Stock splits by companies will become harder if the Securities and Exchange Board of India (Sebi) decides to implement the recommendations of its secondary market advisory committee.

The committee has recommended that listed companies with an average market price of less than Rs 500 in the last six months should not be allowed to split their shares.

In case the company has gone in for a split or a consolidation, it will not be able to do so again for three years, counted from the date on which the split is implemented.

The committee also said companies changing their names in line with the flavour of the market would have to disclose their old names through the stock exchange's websites and through Sebi's filing system, for one year from the date of the last name change.

Rationalising the bar on stock splits, the committee pointed out that companies were using the existing guidelines to resort to frequent splits and subsequent consolidation within a short period.

This, the committee said, was creating confusion among investors, who had no clue whether the market was based on the pre-split, post-split or post-consolidation price.

In the last six months, as many as 22 companies have split their stocks.

Of this, only three companies""Madras Cement, Aurobindo Pharma and Bayer India""had a stock price of over Rs 500.

"The practice of frequent splitting and subsequent consolidation of the face value of shares is not a healthy practice and runs contrary to the spirit of the Sebi circular in 1999," the committee said. Rather than helping investors and increasing the depth of the market, such splitting has gone against their interest.

At present, companies have the freedom to issue shares in any denomination determined by them in accordance with the Companies Act. However, the shares cannot be issued in fractions of a rupee.