Companies rushing to split their stock, enhance liquidity

Companies rushing to split their stock, enhance liquidity
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First Published: Fri, May 07 2010. 12 33 AM IST

Updated: Fri, May 07 2010. 12 33 AM IST
Mumbai: A slew of companies have split their stock or announced their intention to do so, seeking to woo retail investors who have shied away from share investments after the 2008 crash. However, past data shows that such moves do not always lead to an increase in trading.
Thirty-three firms have split their shares since January, and at least five more have announced their intention to do so. India’s oldest mortgage player Housing Development Finance Corp. Ltd’s (HDFC) board approved a proposal to split its stock early this month and the boards of drug firm Lupin Ltd and Kotak Mahindra Bank Ltd are expected to clear a similar proposal soon.
When a stock is split, although the total number of shares of a firm increases, its market capitalization, or the total value of the shares, is not impacted, since the price of the stock falls in proportion to the split. But as the price comes down, it becomes easier, particularly for retail investors, to buy the stock.
For instance, the face value of the HDFC share is now Rs10. It closed at Rs2,758.25 on the Bombay Stock Exchange (BSE) on Thursday. It is splitting one share into five. Dividing every existing share into five will bring down the price of each share to Rs551.65.
“A stock split increases liquidity, makes it easier for people to buy,” said R. Vaidyanathan, UTI chair professor (capital markets) at the Indian Institute of Management, Bangalore (IIM-B).
“Companies typically split shares when the prices have run up a lot,” said Jagannadham Thunuguntla, head of equity at SMC Capitals Ltd, a Delhi-based brokerage.
The markets have more than doubled since the lows of March 2009. The country’s benchmark index, the Sensex, has increased by 108.17% and closed at 16,987.53 points on Thursday. In the same period, the shares of HDFC gained 119.64%, Lupin 206.28% and Kotak Mahindra Bank 235.5%.
The last instance when a large bunch of companies went for stock splits was in 2007, when firms such as ABB Ltd, Jaiprakash Associates Ltd and Sun TV Network Ltd had split their stocks. The Sensex had increased seven times during the bull run of 2003-07, prompting many firms to divide shares. The total number of firms that split shares in 2007 stood at 83.
“Companies are realizing that retail investors are not entering the market,” said Nandip Vaidya, head of retail broking at India Infoline Ltd, India’s second largest listed brokerage firm.
Non-institutional shareholding in BSE-500 shares—that constitute 93% of India’s total market cap—has been stagnant. This category of investors owns 17.99% of all BSE-500 shares now compared with 17.76% in March 2008.
Vaidyanathan of IIM-B and a few others say that small investors lost heavily in the market crash of 2008, when the Sensex fell 52% in a year after the collapse of US bank Lehman Brothers Holding Inc.
But not everyone agrees to the philosophy of a stock split being beneficial or leading to an increase in liquidity and trading volumes.
“They are complete gimmicks,” said Chetan Parikh, who heads wealth management firm Jeetay Investments Pvt. Ltd. “Frankly, a company has to ask what sort of investors it wants. Does it want long-term investors or people who churn their shares frequently? Does it want short-term volatility in its prices?”
Mint looked at examples of five large and mid-cap stocks that divided their shares in the past two years and compared their six-monthly average volume before and after the split.
In two cases—GMR Infrastructure Ltd and Jindal Saw Ltd—volumes fell after the division.
GMR’s trading volume after the split fell 46% compared with a 17% fall in the broader market. Trading volume of Jindal decreased 38% compared with a 7% fall in BSE-500.
The other three companies—Bharti Airtel Ltd, Jindal Steel and Power Ltd and Suzlon Energy Ltd—saw their volumes spurt after the share split.
ashwin.r@livemint.com
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First Published: Fri, May 07 2010. 12 33 AM IST