|
Split Shares to Benefit Small Investors
BY Rabindra bhattarai
Standard Chartered Bank Nepal Ltd., Nabil Bank Ltd., Nepal Lever Ltd. and Bisal Bazar Company Ltd. paid 110%, 65%, 100%, and 85% dividend respectively for the fiscal year 2003/04. Without doubt, these are very handsome rates in the present economic environment of the country. Those who purchased these shares at the time of their first issue and who have high income and thus able, to buy the companies’ shares from the secondary market received those handsome dividends. Many small investors yearn to buy the shares in these companies. But the prices of these shares are prohibitive because the provision in the law requires to purchase at least 10 shares of Rs. 100 par and 100 shares of Rs. 10 par (to reach the total par value Rs.1000).
When a company performs well, this performance reflects in the market beating the price up. But the higher price would be affordable only to the high income group and wealthy investors. Thus the benefits of capital gain from the share price appreciation as well as a handsome dividend provided by the company are limited to those wealthy people. This may create a negative image among the masses about the company. Therefore, companies should try to make their stock more affordable to these small investors by reducing the price of the stock.
Though a company has no role to play in increasing, decreasing or fixing the price in the stock market, there is a technique which if applied makes the high priced stock of a company affordable to the small investors and that technique is known as splitting the shares. To split a share, the company replaces existing one share of Rs.100 par value by issuing, say, two shares of Rs. 50 each in par value. After the split of the share, also the price of the stock will decrease, but the number of shares will increase proportionately so that the total par value of the stock in the hand of shareholder remains the same.
However, the drop in share price will make the stock more affordable to a wider pool of investors. Moreover, it increases the number of shares on the stock exchange. But the value of the company, or its market capitalization (shares outstanding X market price per share), does not change. However, the higher demand of the share as they are now affordable to more people will typically drive the share price up, thereby increasing the company’s market capitalization and value.
Moreover, the stock split is also a good buying indicator, signaling that the company’s share price is increasing and therefore doing very well.
Splitting shares is a widely used and acclaimed practice in all well-developed markets. For example, Microsoft Company has splitted its share nine times since it went public.
But not a single Nepali company has splitted its shares till date because the laws (Company Act and the Security Exchange Act) governing Nepali capital market lack the provision to allow splitting of the shares.
It is now time that the concept of stock split be introduced in the Nepali capital market too. It is beneficial to develop the capital market, to attract the small investors toward capital market and to increase the liquidity of the market. Most importantly, it helps to spread the earnings of the highly profitable companies to lower income groups of the society.
|
