De-jargoned | Stock split

De-jargoned | Stock split

What it is

A stock is said to have split when a Rs10 face value share becomes two shares, each with a face value of Rs5. It is done when a firm increases the number of its shares by dividing existing shares into ones with a lower denomination. Consider a firm which has an equity capital of Rs100 crore, with 10 crore shares, each with a face value of Rs10. If this firm opts for a 10:1 stock split, it would issue 10 shares against every existing share. This firm will now have 100 crore shares, each with a face value of Re1. While the firm lowers the denomination of each share in a stock split, the traded share price also adjusts after a split. Say in the above example, the shares traded at Rs100 each pre-split. After the split, they would trade at Rs10. The market cap of the firm (number of shares multiplied by market price) would remain the same.

Why it is done

It is usually done to bring down the price of the share which may have gone up too much and become unaffordable for small investors. Infosys Technologies, in June 2004, opted for a 4:1 split as its shares were trading at Rs5,500 levels. After the split, the shares were trading around Rs1,400. The shares are trading around Rs2,616 currently. ITC in August 2005 and ACC in May 1999 also opted for a 10:1 split.

Types of split

Sometimes firms also go for reverse split. This is usually done when the share price is at extremely low levels and investors may not want to invest in the firm. Consider a firm with a traded share price of Rs5 each. After a 1:10 stock split, investors would receive one share for every 10 existing shares and the share price would increase to a more respectable Rs50 each. LG Balakrishnan and Bros went for a reverse split in March to consolidate the share’s face value from Re1 to Rs10. Also, sometimes firms go for reverse split so as to avoid getting delisted.