Share Split

Companies can decide on providing a share split to it shareholders in order to increase the number of shares. For example, if a company announces a split of 1:1 and if you have 100 shares, then after the record date the number of shares which you hold will be increased to 200. 

Face value of the share will be reduced accordingly. If the face value was 10 before the share split, considering the above scenario of 1:1, then the new face value will be 5.

Simultaneously the Current Market Price of the share will also be reduced appropriately. For example in above scenario, if the CMP of share before the split is Rs.1000, then the CMP of share after the split will be reduced to Rs.500. So the value of a shareholder do not change.

In most scenario, the CMP after the share split will slightly be on the upper side on the benefit of existing shareholders. For understanding purpose on the above scenario, the CMP will not be reduced to Rs. 500, instead it can be around Rs. 550.

The reason why companies go for Share split:

1. Company may think the CMP is high and retail / small investors cannot afford to buy the shares. If the share value is reduced, then it can attract more investors.

2. To raise the capital. When more investors come into picture, companies will have good cash flow.

3. Companies can go for expansion. When they get more cash flow, they can invest in new entity or can go for expansion.

Companies follow the dates for this process (Announcement Date, Record Date and Ex-Bonus Date). This is same as done for the bonus share distribution.

Best Regards,

B G Nareshkumar.