In a move that has significant ramifications on the capital markets, a SEBI panel has recommended that the face value of shares be made a uniform Re 1 in two phases.
Sebi panel for far-reaching liquidity change
Currently 84 crore shares trade on BSE+NSE daily. This figure could rise 10 times
MUMBAI: In a move that has significant ramifications on the capital markets, a Securities and Exchange Board of India panel has recommended that the face value of shares be made a uniform Re 1 in two phases.
In the first phase, said the primary market advisory committee of Sebi, all forthcoming IPOs be priced based on a mandatory Re 1 face value per share.
In the second phase, listed entities having shares with more than Re 1 face value be asked to bring it down to the uniform value.
A DNA Money analysis shows that 93% or 2,783 out of 2,962 currently listed companies have share face values ranging between Rs 2 and Rs 100.
Such divergence makes it difficult for an investor to compare companies using a simple, common yardstick of share price or dividend paid.
But what happens in the case of a stock split?
“For a face value Re 1 share, an equivalent number of shares would have to be issued (a de facto bonus). This will augment liquidity. This has been done in the past and can be done in the future, too,” said T V Raghunath, ED, investment banking, Kotak Mahindra Investment Banking.
Another banker with a US-based brokerage, who did not wish to be named due to compliance reasons, agrees since fractionalisation beyond Re 1 is not possible,
companies can only improve on it. “So stock-splits would not be possible. Companies will be forced to issue bonus shares. We will move back to the old days when there was no concept of a stock-split.”
He said the recommendation does not help the retail investor much because in IPOs, they act based on demand from qualified institutional buyers. “They are not savvy enough to do the earnings per share math,” he said.
Deepak Jasani, head of retail research at HDFC Securities, said there is a positive rub-off, too: companies will not be able to play around by splitting the face value at regular intervals.
“On the negative side, investors will get attracted to the low price due to the small face value, irrespective of other considerations like price-earnings ratio, price to book value, dividend yield, etc. This is all the more applicable for new firms that are setting up large projects and have long gestation periods. If the suggestion is implemented, it could be misused by a lot of promoters,” Jasani said.
Ambareesh Baliga, vice-president of Karvy Stock Broking, says the move also spawns a perception issue: “To many investors, Rs 10 shares trading below Rs 100 will start looking like penny stocks once the face value is reset. This will mean a major mindset-change will be needed for the serious investor,” he said.
The panel recommendation would be discussed at the next Sebi Board meeting —- the first under the new chief C B Bhave.
But why Re 1?
Regulatory sources said the panel thinks bringing face values down for compliance is a better option than asking firms to raise it to a uniform Rs 10 or Rs 100.
“If it was kept Rs 10 then companies that have a face value below that number would have to hike it. No company has a face value below Re 1. So it was pegged at the base,” the source said.
The proposal had been discussed for quite some time, but the final recommendation of has come just now. After being discussed at the Sebi board level, the recommendations would be put out as a draft for public comments before becoming the norm.
d_khyati@dnaindia.net
With inputs from Sanat Vallikappen
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