Divide to rule

Companies are opting for stock splits in a buoyant market to attract retail participation

It is Splitsvilla of a different kind on the Street, which has seen the benchmark Sensex appreciate by 25% in CY14. Around 82 companies have announced stock splits in the current calendar year against 71 in 2013. In the current year, 56 splits were announced in the past five months. Of the overall 82 companies, 58 are small- and mid-cap stocks with a market capitalisation of less than ₹1,000 crore including Shivam Autotech and glass manufacturer La Opala. An indication that these companies are keen on keeping investor interest high in their stocks. The list also includes a host of private and public sector banks such as State Bank of India, Bank of Baroda, Axis Bank and ICICI Bank besides tobacco major, Godfrey Phillips and electricals manufacturer, Havells.

Rushing in for a 'bargain' 

Retail participation has increased in companies that have gone in for stock splits

A stock-split lowers the face value and increases the number of shares outstanding without making any difference to the market cap. This lowering of face value creates the illusion of a lower price among retail investors. For example, Axis Bank stock was trading around ₹2,000 when its face value was reduced from ₹10 to ₹2 on 28th July. The stock now trades at ₹395. While a commonly cited reason for a stock split is to increase liquidity and accessibility to retail investors, many a times there is more than meets the eye. Hence, for many rogue promoters, the degree of reduction in the face value depends on how big an optical price illusion they want to create. 

Dipen Shah, senior vice-president at Kotak Securities, says, “Stock splits are primarily done to increase the amount of participation in the stock by making the prices lower and increasing the liquidity in the market. Fundamentally, nothing changes in the stock.” The expanding list of companies which are opting for splits makes it clear that many companies are playing the game of wanting to make their stock price look cheaper. 

 In fact, a recent media report quoted KR Kamath, CMD of Punjab National Bank as saying, “When the stock price touches ₹1,000, the retail investor is reluctant to buy. Hence we decided to go for a stock split to attract the retail investor.”

In quite a few cases, the split has achieved what it set out to: bring in more retail participation. “Trading volumes typically increase after a split,” says Shah. Among small and mid-cap companies that went in for a split last year, VKS Projects, Astral Poly Technik, Relaxo Footwear and Rasoya Proteins have shown a substantial increase in the number of retail investors. Among mid-caps, M & M Financial and in large-cap, Asian Paints has seen an increase in retail participation.

In theory, a split infuses liquidity and aids ‘market forces’ to better discover the true price of a stock. But whether retail investors have actually gained buying  post split warrants a separate story.