Sub-Division of Equity Shares

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Somasekharan C (Querist)
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08 October 2010 Dear Sir

Some of the companies are sub-dividing their equity shares of higher value into smaller value. Please let me know for what purpose they are doing so and what is the benefit. (e.g. The South Indian Bank Ltd issued Equity shares of a face value of Rs. 10.00. Now they divided it into a face value of Rs.1.00)

Meetu

Meetu (Expert)
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19 October 2010 What you are referring to is called as stock split, Stock split refers reducing the face value of shares. This is done by companies typically when the market price of the share has appreciated, which makes the share costly and unaffordable for small investors. For eg: the share of company ABC with a face value of Rs.10, could be trading in the market at a price of say, Rs.1500. It may be too expensive for small investors to own the share of this company at such a high price. Hence, a stock split is done to reduce the price of the share so that it could be bought over by small investors
Stock split results in an increase in the number of outstanding shares .The market price also gets adjusted in proportion of the split. The price is adjusted such that the market capitalization(No. of outstanding shares * the market price) remains the same before and after the split.
For eg: If XYZ company is currently trading at Rs.100 and an investor holds say 100 shares. Value of shares = Rs.10000. The company declares a stock split of 2 for 1, so the number of shares held by investor get doubled to 200 and the market price also gets adjusted in the same proportion and becomes Rs.50. The value that the investor holds still remains Rs.10000(200*50). There is a likelihood that the share price may go up after the split because of increased demand due to lower price.