Share splits may replace bonus issues

Share splits are currently being considered as the alternate to bonus issues by stockbrokers but listed firms are cautious about the move as it is still not clarified whether share splits in fact can be carried out.

“The Registrar of Companies has still not clarified whether share splits could be approved, but at the same time the new Companies Act has not prohibited it,” S. Umasudhan, Research Analyst, S.C. Securities told The Sunday Times FT, adding that bonus issues is a mechanism to substitute the share splits.

Share splits like bonus issues will increase the number of shares in the market. However a capitalisation of reserves is not required. It is a mere sub-division of shares, which could be used to maximize the liquidity of companies in the share market.Umasudhan said that according to legal advisors since bonus issues present a grey area in the new Companies Act, share splits are an option. “However, firms are seeking legal advice,” he said.

He said that now firms are expected to have reserves worth a ‘reasonable’ value, which is beneficial to the shareholders and to the companies. Therefore a market value or net asset value per share or any other values derived from alternative valuation techniques could provide a fair definition to the term ‘reasonable’.

“Stock Dividends (bonus issues) cannot be provided as it will have a major drain on the company’s reserves, which will lead to a disqualification under the solvency test,” he said, adding that to get qualified in the solvency test, a company’s total assets should be greater than the stated capital.

The new Companies Act does not prohibit a share split. However a clarification has to be sought as to whether Registrar of Companies allow share splits.

Firms such as Tokyo Cement (Lanka) Ltd have announced to the trading floor that it cannot proceed with the pending bonus issue of 1 for 1, according to the new Act.

However the company has stated that a further announcement will be made to the trading floor in due course on the ‘new shareholder value enhancing strategies’.