Split to gain

Split the stock and watch the action hot up. That seems to be the recurring theme in the stock markets this year. In The first quarter of 2000 will be remembered as much for the Sensex crossing the 6000-mark, as for the increased number of companies that opted for stock splits. In fact, part of the euphoria during the early months was driven by the anticipation of enhanced liquidity in the stocks, after the split.

The stock split brigade was led by the market favourites - Zee, Wipro, Hindustan Lever, Satyam Computer and Infosys. HCL Technologies, Dabur, Cummins India, Abbott Laboratories and Mastek form the next flank, having recently announced their stock-split plans. Post-stock split, stock have recorded some typical behaviour including increased volumes and depressed prices.

Elaborating on the drop in 'price syndrome', Rajiv Choksey of Choksey Securities says that a stock split invariably triggers sell orders from players who want to book capital losses for tax purposes. These notional losses are then set off against any capital gains, thereby reducing the incidence of tax.

A three-for-one stock split means that that the original share is split into three shares. For instance, if an investor has 50 shares worth Rs 450 each of Company Z and the stock is split three-for-one; the investor will have 150 shares of Rs 150 each. By selling the share worth Rs 150, the investor can show a loss of Rs 300 which is actually a notional loss.

"During boom time, brokers and investors make sizeable profits. If they want to to avoid paying taxes on these gains, then the stock split is a good opportunity to show losses in the books," Choksey says. The practice is to sell the original shares and keep the new shares with them.

Apart from providing brokers and investors an opportunity to manage their tax liabilities, stock splits have also sparked off increased trading in the scrips. The Hindustan Lever counter, which used to see average monthly volumes of around 2.5 million shares before the split in June this year, saw volumes of 29 million shares in July.

More floating stock also helps iron out volatilities with a larger number of investors as the market price reduces. Infusion of higher liquidity attracts the attention of the institutional investors as they are provided with better entry and exit opportunities. In fact, according to analysts, liquid stocks like HLL and Satyam that go in for stock splits get realistic valuations for their shares and are not prone to overheating.

Analysts say that stock splits are generally resorted to by companies in order to give its investors a better deal in terms of easier exit and entry, good valuations, returns and moreover a protection from volatile swings in prices.

Infosys, which split its stock (two-for-one) in January-end, saw an immediate drop in prices, flared up the next month and then dropped to fairly stable levels. From a high of Rs 8466 (adjusted for split) on January 4, the share was quoting at Rs 7,000 level after the split. Though the price of the scrip went up again to Rs 11,000, since then the scrip price is averaging at Rs 7,000.

Satyam split its stock on August 4 (five-for-one) and its prices have averaged around Rs 450 per share since then. Prior to the split, the stock prices were fluctuating between Rs 400 and Rs 1500 (after adjusting for the split).

Typically in tune with the new age ethos, it is the infotech and media stocks that have been quick to see the inherent advantages of going in for stock splits, while most of the old economy stocks are still relatively averse to the concept.

ALSO SEE:
Hindustan Lever leads the way
Tutorials on stock splits

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