VERY often companies go for stock splits if their stock price is very high, making it difficult for investors to buy in huge quantities. Stock split results in lowering the share price which, in turn, can increase investor interest in the company. For example, there's a firm with a capital of 10 crore with one crore shares, each with a face value of . 10. If the company decides to split its shares with a face value of 1, then it will issue 10 shares, against 1 share held by each shareholder. The firm will now have 10 crore shares, with face value of . 1, even as its equity capital will remain the same at 10 crore. Mortgage lender HDFC recently opted for a stock split in the ratio of 1:5. A stock split is an increase in the number of outstanding shares in such a way that the proportionate equity of each shareholder remains the same.
Once a company decides to split its share, it calls for a book closure. Post the book closure, the stock price generally falls to the same extent as the split. So, if the stock was trading at . 200, before the split, and the face value goes down from 10 to 5 post the split, it will trade at 100 per share. However, the market value or market capitalisation, which is the number of shares multiplied by the market value of the stock, will not change and remain the same. A stock split requires the approval of the company's board of directors and shareholders. Once the board approves the proposal, the company can call for a book closure and split its shares.
