Sebi may impose floor price for stock splits

Move to curb misuse, price rigging and tax evasion

The Securities and Exchange Board of India (Sebi) is likely to set a floor price for companies to qualify for stock splits in order to curb market manipulation.

One of the proposals allows splits only in stocks priced above Rs 500 consistently for the previous six months.

In a stock split, a company divides its existing shares and although the number of shares increases, their total value remains intact.

Setting floor price

• Sebi proposal: Setting a floor price of Rs 500 for stock split
• Why: Finds the activity being misused for manipulation and tax evasion by small-value stocks
• What could work: Raising the floor on stock split will remove confusion for investors
• What could go wrong: Liquidity may be impacted

“The issue was debated by the regulator during a recent secondary market advisory committee meeting. A decision will be taken after careful consideration,” said a source. An e-mail query to Sebi did not elicit a response.

Sebi had found small listed companies using stock splits to evade taxes and manipulate the market, sources said.

“Splits in small-cap stocks are generally manipulative and end up confusing investors. If a floor is set, it will be an extension of curbs imposed on the primary market,” said Arun Kejriwal, founder, Kris Securities.

More than 50 companies have applied for stock splits this year and only 30 per cent of these had shares prices above Rs 500.

“Retail investors find it easier to deal with smaller denominations. The more you try to regulate, manipulators tend to find more loopholes. The regulator should allow market forces to play,” said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities.

“If increasing liquidity is the intention, then the trade volume should increase. But in most cases, there is only a marginal increase in volume in these low-value counters after the split,” said Kejriwal.

This is not the first time Sebi is contemplating such curbs. In 2004, a Sebi-constituted committee had made similar proposals but the regulator decided not to implement them.

Sebi allows companies seeking to list to split shares with a face value of up to Rs 10 if the offer price is Rs 500 or more. In case the offer price is less than Rs 500, the face value should be Rs 10 per share.

In recent orders on tax evasion and market manipulation, Sebi has observed some entities using stock splits.

“Misuse of stock splits should be arrested, but the benevolent aspects should be available to investors. Curbs on stock splits for shares priced below Rs 500 could impact liquidity in mid-cap growth stocks,” said Mahavir Lunawat, managing director, Pantomath Capital Advisors.