Usually the only reason for a share split is when the age or success of the company has resulted in the shares of the company trading at very high values per share
Since recent amendments to the Commercial Companies Law in Oman there has been much talk of share splits and, it seems, a fair amount of confusion as to what the consequences, or even meaning, of share splits may be.
It is important to realise that share splits are purely a cosmetic change which some companies pursue in order to make their shares more readily tradable. A share split, in fact, has no impact on the formal issued share capital of the company and does not change the und-erlying percentage ownership of the company or grant any more 'rights' to any party.
Usually the only reason to pursue a share split is in circumstances where the age or success of the company has resulted in the shares of the company trading at very high values per share. In such a case it could be difficult for investors, and particularly smaller investors, to achieve a holding of any significant number of shares. Whilst this, of itself, is the not the issue (as the shareholder, after a share split, holds more shares but they are worth the same as the smaller number of shares previously held), there are often perception issues that the shares are 'too expensive for me to buy' and issues with dealing in fractions of shares.
In Oman recent changes have occurred. Royal Decree no. 99/2005 has introduced the latest amendments to the Commercial Companies Law. Central to these changes are the introduction of a flexible nominal share price to increase market liquidity, and a more stringent cap on the remuneration of directors, although that aspect is not part of this paper.
Previously, the nominal (sometimes called 'par') value of a single share in a joint stock company was fixed at RO1. The new law allows the company to determine the nominal value of one share in the Articles of Association, subject to a maximum value of RO1.
Apart from Oman Telecommunications Company, the face value of one share of all Omani companies was fixed at RO1. The change to this law means that companies will now be able to split their shares, lowering the face value of each share. Consequently, this should increase market liquidity and facilitate growth although it does not of itself increase market capitalisation or the value of individual companies but rather the physical number of shares that the market capitalisation is represented by.
This change in the law was instigated following concerns that the market increasingly required more freely moving liquidity, an observation reflected in the fact that market turnover declined from an average of RO6mn between January and June of 2005 to nearer RO3mn in late 2005.
So, how does a share split work in practice? For example, a company which has one million RO1 nominal shares, each trading at, say, RO22.500, makes it difficult for small investors to get an economic holding without dealing in confusing odd numbers.
Spending RO5,000 on its shares would get you 222.222 shares whereas most investors may prefer to deal in round hundreds (or hopefully thousands) of shares. They could still do that by ordering by share numbers rather than price but the mismatch remains to some extent with high share prices.
If the company splits each share into 10X 100bz par value shares, they would trade at RO2.250 and the investor could acquire a round number of 2,000 shares for RO4,500. If further increases occur then the investor also has flexibility to carve off a number of his shares to 'profit take' as opposed to the prior scenario where it is much more difficult to be flexible.
Of course share splits are most common where share prices have risen sharply for some time or in companies that have outstripped market performance and become overly price weighted for the market in which they are traded. For a reason that I have never been able to fully fathom, news of a share split is itself often seen as positive and can cause prices to rise. There is no scientific foundation for this phenomenon but it certainly does happen. I tend to put it in the category of 'sentiment' which is so often unpredictable and is affected by all sorts of non-economic factors.
The other side of the coin to share splits is the possibility to reverse the process in the case of companies whose share values have declined but whose shares are still traded. If a company's shares have fallen to the 'penny special' level then a company may, legitima-tely and without changing its capital, seek to consolidate those shares by doing the reverse of a share split (a share consolidation).
These are exactly the same as splits, except that you will have fewer shares worth more each rather than more shares worth less. Consolidations can also be triggered by events such as return of cash to shareholders, through take overs, subdivision sell-offs and the like. In Oman these are less likely due to the capitalisation rules requiring recapitalisation or other remedies in case of loss of substantial capital.
It is important to differentiate between a share split (or consolidation) and a new share issue or capital reduction. On the surface, these can look identical to splits or consolidations.
The difference is that they do represent a change in issued share capital.
Dividends will also be affected proportio-nately (but not in respect to the total holding of any shareholder assuming a static holding) in that a 'split' share that has a face or par value of one fifth of its prior value will attract a proportionately reduced share of the total dividend pool but at least the investor will have five times as many of them, placing the investor right back in the same position as he or she would have been prior to the split. The same applies in reverse on a consolidation.
By the same logic, price/earnings (P/E) ratios and all other data calculated for each share must change to reflect the numeric changes in shares issued although the total company pre-tax profits, dividends paid and so on would remain the same. I hope that this simplifies the issue and that we see many successful splits in Oman fostering increasing liquidity.
CCL amended
The change in Commercial Companies Law was necessitated following concerns that the market required freely moving liquidity
Splitting shares and lowering the face value of each share will increase market liquidity and facilitate growth
By Andrew Rae
businesstoday 2006
