Stock Split in the Indian Stock Market
Stock Splits and Their Significance in a Long-Term Investment Plan
The Indian stock market, like its counterparts globally, operates on various mechanisms that aim to enhance the market’s efficiency, attract investors, and improve liquidity.
One such mechanism is the stock split. A stock split is a corporate action where a company increases the number of its outstanding shares by issuing more shares to existing shareholders.
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This process does not change the market capitalization of the company, but it does alter the per-share price and the number of shares held by investors.
Understanding Stock Split
A stock split occurs when a company decides to divide its existing shares into multiple new shares.
For example, in a 2-for-1 split, each share is divided into two, effectively doubling the number of shares held by each shareholder.
If a company had 10 million shares outstanding before the split, it would have 20 million shares after a 2-for-1 split. Importantly, the price of each share would be halved, meaning the overall value of each shareholder’s holdings remains the same immediately after the split.
Reasons for a Stock Split
Improving Liquidity:
One of the primary reasons companies in India opt for a stock split is to improve liquidity. When a company’s share price becomes too high, it may deter small investors from buying the stock.
By splitting the shares and lowering the price per share, the company makes its stock more accessible to a broader range of investors, thereby enhancing liquidity.
Attracting Retail Investors:
Indian retail investors often find high-priced stocks less attractive due to budget constraints.
A lower per-share price after a stock split can make the stock more affordable, potentially attracting a larger base of retail investors.
This broader investor base can contribute to increased demand and better market dynamics.
Signaling Confidence:
A stock split can also be a signal of confidence from the company’s management.
It suggests that the company expects its stock to continue performing well in the future, which can be a positive signal to investors.
Aligning with Market Norms:
In some cases, companies may split their stock to bring the share price in line with those of similar companies in the same industry or market segment.
This can make the stock more comparable and competitive in the eyes of investors.
Impact of Stock Split on Investors
No Change in Investment Value:
A stock split does not alter the total value of an investor’s holdings. If an investor holds 100 shares at ₹1,000 each before a 2-for-1 split, they will hold 200 shares at ₹500 each after the split. The total value remains ₹100,000 in both cases.
Psychological Effects:
Though the intrinsic value remains unchanged, the psychological impact on investors can be significant.
A lower share price may lead to increased trading activity, as the stock becomes more appealing to smaller investors.
This can sometimes lead to short-term price appreciation due to increased demand.
Dividends:
Post-split, dividends per share are usually adjusted to reflect the increased number of shares.
If a company paid ₹10 per share before a 2-for-1 split, it would likely pay ₹5 per share after the split, maintaining the same total dividend payout.
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Examples of Stock Splits in India
Several high-profile companies in India have undertaken stock splits.
For instance, Reliance Industries announced a stock split in 2017, reducing its face value from ₹10 to ₹5. Similarly, HDFC Bank has also conducted stock splits to make its shares more affordable to the general public.
These actions generally resulted in increased trading volumes and sometimes positive movements in stock prices due to heightened investor interest.
Here are 10 examples of stock splits in India, spanning various sectors:
1. Reliance Industries Ltd. (RIL)
Stock Split Date: September
2017
Split Ratio: 1:1 (From ₹10
to ₹5 face value)
Before the September 2017 split,
RIL shares were around ₹1,600 each, dropping to approximately ₹800 post-split
due to the 1:1 ratio.
2. HDFC Bank Ltd.
Stock Split Date: September
2019
Split Ratio: 1:2 (From ₹2 to
₹1 face value)
Before the September 2019 split,
HDFC Bank's shares were ₹2,200 each; post-split, they adjusted to about ₹1,100.
3. Infosys Ltd.
Stock Split Date: June 2015
Split Ratio: 1:2 (From ₹5 to
₹2 face value)
Before the June 2015 split, Infosys
shares were ₹3,800 each; post-split, they adjusted to around ₹1,900 each.
4. Avenue Supermarts Ltd. (D-Mart)
Stock Split Date: October
2021
Split Ratio: 1:2 (From ₹10
to ₹5 face value)
Before the October 2021 split,
D-Mart's shares were ₹3,500 each; post-split, they adjusted to about ₹1,750
each.
5. Tata Consultancy Services Ltd. (TCS)
Stock Split Date: June 2018
Split Ratio: 1:2 (From ₹2 to
₹1 face value)
Before the June 2018 split, TCS's
shares were ₹2,800 each; after the 1:2 split, they adjusted to about ₹1,400
each.
6. State Bank of India (SBI)
Stock Split Date: November
2014
Split Ratio: 1:10 (From ₹10
to ₹1 face value)
Before the November 2014 split,
SBI's shares were ₹2,600 each; after the 1:10 split, they adjusted to about
₹260 each.
7. ICICI Bank Ltd.
Stock Split Date: October
2017
Split Ratio: 1:5 (From ₹10
to ₹2 face value)
Before the October 2017 split,
ICICI Bank's shares were ₹300 each; after the 1:5 split, they adjusted to about
₹60 each.
8. Maruti Suzuki India Ltd.
Stock Split Date: July 2018
Split Ratio: 1:2 (From ₹10
to ₹5 face value)
Just before the stock split in July
2018, Maruti Suzuki’s share price was approximately ₹9,500 per share. After the
1:2 split, the share price adjusted to around ₹4,750 per share.
9. Kotak Mahindra Bank Ltd.
Stock Split Date: November
2015
Split Ratio: 1:5 (From ₹5 to
₹1 face value)
Just before the stock split in
November 2015, Kotak Mahindra Bank's share price was approximately ₹1,800 per
share. After the 1:5 split, the share price adjusted to around ₹360 per share.
10. Axis Bank Ltd.
Stock Split Date: July 2014
Split Ratio: 1:5 (From ₹10
to ₹2 face value)
Just before the stock split in July
2014, Axis Bank's share price was approximately ₹1,600 per share. After the 1:5
split, the share price adjusted to around ₹320 per share.
Stock Splits Make High-Priced Large-Cap Stocks Accessible for Individual Investors:
In the financial world, high share prices of large-cap companies often pose a barrier for individual investors, limiting their ability to buy shares and participate in the market.
This can create a sense of exclusion for retail traders who may find themselves financially constrained by the high cost of a single share.
Stock splits offer a viable solution to this issue. When a company executes a stock split, it divides its existing shares into multiple new shares, thereby reducing the price per share proportionally.
Conclusion:
Stock splits are a strategic tool employed by Indian companies to make their shares more accessible, improve liquidity, and attract a broader base of investors.
While a stock split does not inherently increase the value of a company, the psychological and market dynamics it triggers can have a favorable impact on a company’s stock performance in the long run.
For investors, understanding the implications of a stock split is crucial, as it affects the number of shares they hold and the price per share, but not the overall value of their investment.
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