Time To Abolish The Face Value Concept (25 Aug 2003)
It is a niggling little problem that was created by the regulator at the turn of the century, and it needs urgent fixing. Sometime in June 1999, the Securities and Exchange Board of India (SEBI) amended the guidelines relating to the denomination of equity shares and allowed companies to choose the par value or face value of their stocks. Its decision was the outcome of a decade-long debate where top investment bankers had argued that India needs to get away from the concept of a fixed face value. By abolishing face value, the capital of a company is, in effect, merged with the share premium account and the declaration of dividend per share provides a much clearer picture of corporate performance.
It was argued that the practice of declaring a percentage dividend based on a low face value tends to be misleading, especially when the company has raised money at a hefty premium or is traded at a high price in the secondary market.
The demand to abolish face value became even more strong after the Initial Public Offering (IPO) market went bust following the excesses of the 1993-96 period when companies raised money at hefty premia and immediately siphoned it away to the promoters’ private coffers. Until SEBI’s amendment of the rules in June 1999, a 1983 guideline had required companies to issues shares with a face value of either Rs 10 or Rs 100. Even then, it had already been decided that the face value would be standardised at Rs 10 and many companies had begun the process of splitting their Rs 100 shares in the hope of improving liquidity and allowing easy comparison of prices across similar businesses.
Typical of SEBI’s functioning those days, it seemed to accept the many suggestions on abolishing face value, but gave the decision a vicious little twist that negated its very purpose. SEBI merely removed restrictions on denomination and allowed companies to reduce the face value to Re 1, or multiples of Re 1, so long as the shares were dematerialised. In the process, it opened the doors to more confusion and mischief.
The first to cash in on this new freedom were the Information Technology (IT) companies, which were in the grip of a worldwide mania for their precious stock. They also successfully lobbied to have SEBI’s minimum public offering rules amended in their favour and reduced to 10 per cent of capital instead of 25 per cent. By reducing the face value of their stocks, they ensured that a larger number of investors could invest in these companies and keep their prices sky-high. Immediately after SEBI changed the face value rules in 1999, Wipro, then a market favourite with extremely low floating stock, had split its Rs 10 shares into five of Rs 2 each. Infosys followed with a similar face value. Hindustan Lever also split the face value of its shares to Re 1 each. The capital market welcomed these moves, because it allowed smaller investors to participate in the bull run. The pharma companies — Dr Reddy’s and Sun Pharma — soon dropped the face value of their stocks to Rs 5 each, and Godrej Industries, for a short while, had a face value of Rs 6.
Soon enough, a variety of IT and entertainment companies began to split their shares; they included Satyam, HCL Technologies, Creative Eye (all reduced face value from Rs 10 each to Rs 5) and many others.
In October 1999, Zee Telefilms, which was famously ramped up to Rs 2,330, announced a split. Those days, Ketan Parekh groupies predicted that the stock would soar to Rs 10,000 (on Re 1 face value) and used to chant dus ka ek or ek ka dus. This meant that the Rs 10 paid-up share would be split into 10 of Re 1 each, and then each share would soar to Rs 10,000. ZEE Telefilms, in fact, fell from its peak of Rs 2,330 in 2000 to a low of Rs 60 last year. It now trades around Rs 117.
But the IT, dotcom, media and entertainment stock bubble burst before it has spread confusion across other sectors of industry. Stock prices fell so rapidly that nobody complained about being baffled by differing face values.
But the trend of splitting shares continued into 2002 when Balaji Telefilms split its shares to a face value of Rs 2 each. And the present bull run is sure to bring more such decisions. Since SEBI these days is working hard at empowering investors and reducing confusion in the market place, it should change the guidelines again to correct its earlier mischief and bring better order into the market.
Most investors (not investment experts) would admit that different face values are indeed a source of confusion. Also, shares with lower face values seem to quote at slightly higher prices. A case in point is the price of Wipro immediately after its split. Investors behaved as though Wipro had issued a bonus and the stock rose 40 per cent or more.
Indeed, Wipro was an exceptionally illiquid stock in the midst of a manic market, and investors are probably more mature five years later. But constantly changing face values remain a source of irritation.
Shouldn’t SEBI then use this bull market to reverse the mischief of 1999? Ideally, it must abolish the concept of face value. When companies are forced to declare dividend on a per share basis (including reserves) investors will stop being fooled by hefty percentage dividends declared on low face values. But at the very least, SEBI must push for uniform face value, even if it means asking hundreds of companies to split their stocks and reduce the face value to Re 1 each. And although this would require companies to hold shareholder meetings before implementing any change in rules, it would be an important step towards adopting global practices and reducing confusion among investors. -- Sucheta Dalal