Why Do Companies Undertake A Stock Split?

When a share is originally issued, you have different kinds of face value. In India there were shares that were issued at a face value of Rs 100 and Rs 10, back in the good old days. These days we do not hear of shares being issued at a face value of 100.

Shares are mostly issued at Rs 10 face value.

Why do companies than split their shares?

The one reason to split the shares is to make them more affordable. Let us cite this with an example. Shares of ICICI Bank were issued at a face value of Rs 10.

However, over a period of time the bank has grown tremendously, which took the share price to Rs 1250 levels. Now, to get retail participation at such a high price would be difficult.

The best thing is to reduce the face value from Rs 10 to Rs 2, which ICICI Bank did. This reduced the share price from Rs 1250 to Rs 250. The price given here of ICICI Bank is just an example, though the bank had reduced its face value from Rs 10 to Rs 5.

The market capitalization and other parameters do not change. One important thing to remember is that the outstanding share changes and so does the market price.

Most of the A group shares are traded at face values that are much lower than the Rs 10, which was issued. The other way to make the price affordable is to issue bonus shares. After that the share price falls, depending on the bonus ratio.

A company like Reliance Industries has done that without splitting its shares. The list of companies that have split their shares includes:

Company Name	Face Value
HDFC Bank	Rs 2
ICICI Bank	Rs 2
ITC	Re 1
SBI	Rs 2
PNB	Rs 2
Infosys	Rs 5
TCS	Rs 5
ONGC	Rs 5

The above are just select stocks from the Sensex that have split their shares to make them more affordable. For example, if ITC had not to split its shares from Rs 10 to face value Re 1, the stock would be quoting at Rs 3,200 today, making retail participation very difficult.

Many companies may also look at the possibility of a reverse stocks split to increase the price of their shares. For example, if a company has a face value of Re 1 and has shares that are traded at Rs 20, it may increase the face value to Rs 10 and the share may start trading at Rs 200 on face value of Rs 10.

Though, one must admit that this very rarely done and in the Indian context unheard of.

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