Stock split
Also written Share split · Split
A corporate action that cuts the face value of a share in a defined ratio and multiplies the number of shares to match — more shares, a lower price, and not one rupee of new value.
In plain language
A company whose share trades at Rs 6,400 has a problem it can solve with a book entry. Small investors cannot buy a round lot; liquidity thins; the price looks forbidding. A stock split cuts the face value — Rs 10 becomes Re 1 — and every holder receives ten shares in place of one.
Nothing about the business changes. The company's share capital is identical, its reserves are untouched, and every shareholder owns exactly the same percentage as before. What changes is the price tag and, the company hopes, the number of people willing to look at it.
How it works
The workbook's convention: a stock split of 1:5 means one existing share splits into five, and the face value falls to one-fifth. Hold 100 shares of face value Rs 10 and after a 1:5 split you hold 500 shares of face value Rs 2.
From the company's side there is no change in share capital, because the increase in the number of shares is exactly offset by the fall in face value.
The workbook is direct about what a split is: a book entry with no economic benefit whatsoever to shareholders, done to influence investor psychology through a lower price per share and to improve liquidity. Every per-share figure — EPS, book value per share, market price — falls in proportion immediately. Proportionate ownership does not move, so at the overall ownership level there is no negative impact.
Share consolidation is the reverse: a 5:1 consolidation turns five shares into one and multiplies the face value fivefold.
The formula
New share count = Old count × split ratio
New face value = Old face value ÷ split ratio
Share capital = unchanged
Theoretical post-split price = Pre-split price ÷ split ratio
A worked example
An IT services company before the split:
| Rs | |
|---|---|
| Shares outstanding | 2 crore |
| Face value | 10 |
| Share capital | 20 crore |
| Reserves | 680 crore |
| Profit after tax | 96 crore |
| Market price | 6,400 |
EPS = 96 ÷ 2 = Rs 48 BVPS = 700 ÷ 2 = Rs 350
P/E = 6,400 ÷ 48 = 133× Market cap = Rs 12,800 crore
After a 1:10 split — face value Re 1, 20 crore shares:
Share capital = 20 crore ← unchanged
Reserves = 680 crore ← unchanged
EPS = 96 ÷ 20 = Rs 4.80
BVPS = 700 ÷ 20 = Rs 35
Price = 6,400 ÷ 10 = Rs 640 P/E = 640 ÷ 4.80 = 133×
Market cap = Rs 12,800 crore ← unchanged
An investor holding 50 shares worth Rs 3.20 lakh now holds 500 shares worth Rs 3.20 lakh.
A contradiction worth knowing. Chapter 9.5 says a split carries no economic benefit whatsoever, then gives the SBI example where a holding worth Rs 2,700 before the split (1 share at Rs 2,700) is worth Rs 2,950 after (10 shares at Rs 295). The chapter's own next sentence reconciles it: the post-split market price is set by demand and supply, not by the split. In an exam, the theoretical price is the answer.
Why NISM asks about it
Chapter 9 (Corporate Actions, section 9.5) covers stock split immediately after bonus issue and immediately before share consolidation. Expect the ratio convention as a direct question, a calculation of the post-split share count and face value, and the distinction from a bonus issue — which capitalises reserves and leaves face value alone.
Common exam traps
- Read the ratio the workbook's way. 1:5 means one share becomes five (a split); 5:1 means five shares become one (a consolidation). Reading it backwards reverses the answer.
- Face value changes in a split and does not change in a bonus issue. Share capital is unchanged in a split but increases in a bonus, funded out of reserves.
- Per-share data deteriorates immediately — EPS, BVPS, DPS and price all fall in proportion. Percentages such as P/E, dividend yield and ownership share do not move.
- There is no economic gain. If an exam option offers "shareholders become wealthier", it is wrong, whatever the SBI figures in 9.5 appear to show.
- Historical per-share series must be restated for splits before any growth rate is computed, or an EPS that fell from Rs 48 to Rs 4.80 reads as a 90% collapse.
- A split is not a buyback and not a dividend. No cash leaves the company and no share is extinguished.
Where this is taught
- Series XV · Chapter 9: Corporate Actionsintroduced here
- Series X-B · Chapter 13: Tax provisions for Special Casesintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
Related terms
- BuybackA company purchasing its own shares out of reserves and extinguishing them, reducing share capital and raising earnings per share for the shareholders who remain.
- Diluted EPSEarnings per share recalculated as if every instrument that can convert into equity had already converted — the pessimistic, and usually the more honest, share count.
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Corporate actionAn event initiated by a company that changes the securities it has issued — dividend, buyback, bonus, split, consolidation, rights issue or merger — and which the registrar has to execute investor by investor.