One of the most common ways in which companies reward shareholders is by splitting the stocks.
This corporate action doubles the number of shares while increasing its affordability, as the price of a stock falls after a stock split.
According to media reports, the Securities and Exchange Board of India (Sebi) is now planning to come up with a fresh set of rules regarding the timeframe for the allotment of bonus and split shares, in light of the recent controversy surrounding Nykaa, when the ex-date of bonus shares coincided with the end of lock-in period of the pre-initial public offering (pre-IPO) investors. Sebi will come up with tighter norms around the announcement, record and ex-split date.
The Stock Split Process
The Board of the company first approves the stock split, and after that, a record date is set. Usually, a stock rallies after a stock split announcement, as the demand for the stock increases.
The investors, who are holding the stocks on the record date, will receive the stock on the ex-split date, which is the day before the new stocks appear in the investors’ demat account, and the price of the stock gets adjusted as per the split ratio.
A company usually comes up with a stock split if the price of the stock has soared and is not in the affordable range.
The main purpose of the stock split is to modify the face value of a stock. So, when a company goes for a 1:10 split on share with a face value of Rs. 10, it means that the face value will be reduced to Re 1. What it means is that a single share of Rs. 10 will now get split into 10 shares of Re. 1 each. But, such a move comes with a flipside – the price of shares would also fall proportionately, while the total value of your holding would remain the same.
This means that more number of shares will now be available to investors. This will increase the liquidity in the stock and make the stock price more affordable for the investors. However, there is no change in the market capitalisation of the company. Only the number of shares gets increased in this process.
Impact On Dividends And Price
The amount you will receive as the dividend will not get affected after the stock split. The dividend provided by a company is based on the face value of the stock.
So, when a company whose share price is Rs. 500 and face value is Rs. 100, announces a 10 per cent dividend, it means that the company will pay out a dividend of Rs 10.
So, even if the face value of a company decreases, you will also be receiving shares. Hence, the dividend doesn’t get impacted by the stock split process.
However, the stock usually goes through a volatile period during and after the stock split process. Before the stock split record date, the price usually soars, as its demand increases, and after the ex-split date, the price falls as per the split ratio, and may fall further, if a lot of investors opt for profit booking.
