Business Times

Share split mania hits Colombo – race to increase market cap

By Duruthu Edirimuni Chandrasekera

Colombo share market has seen many share splits during the past few months with some blue chips joining the trend in what analysts call a race to hit the largest market capitalisation. Splits are usually announced to create liquidity in a firm by reducing its share price and increasing the number of shares outstanding. While this doesn’t impact on the intrinsic value of firms, it attracts retail investors as it is more affordable to them. “Some firms seem to be noticing that a company such as Environmental Resources and Investments is amongst the first five in market capitalisation, which may be disconcerting to them. This appears to have prompted some index heavy shares to come up with share splits of their own and increase their market cap,” an analyst said.

Ceylon Guardian, an investment arm of the Carsons group, Ceylon & Foreign Trades and Aitken Spence Holdings declared share sub divisions and were sought after by investors last week. Some analysts said there are many reasons that a company decides on a share split - such as its share price trading at a discount to the fair value, and a key reason for that (assuming all else is well), is the lack of liquidity in the share. “Splitting opens up a new market for them and the liquidity would increase,” an analyst said.

He noted that a share split enables investors with large holdings in these companies to exit easily as well, and would also attract large investors who would have had concerns due to the lack of liquidity.
“In the case of foreign investors, this is a key concern and companies who may like to attract large foreign investors may be looking at this angle as well,” he added. Some companies could do the split purely to raise the market value of the company, observing the behaviour of investors after a split, where the values of companies are taken to astronomical heights. “Then they are managing a bigger company.”

Many point out that a split does not change the economics of the business. “As most share prices have moved, they sometimes go out of the reach of retail investors. When this happens trading and liquidity in the share dries up. The purpose of the share split is to improve the liquidity. Usually investors provide a premium to liquid vis-à-vis illiquid shares due to the ability to sell them if required without affecting the price too much (e.g. Dialog),” Deshan Pushparajah, Manager Corporate Affairs Capital Alliance told the Business Times.

However he noted that the premium that investors now attach to share splits (i.e. the price appreciation seen after a company announces a share split) is completely irrational and has no basis to it. “Firms seem to announce share splits as a short cut to achieving price appreciation,” he said.

Murtaza Jafferjee, CEO JB Stockbrokers noted that in Sri Lanka there seems to be a behavioural characteristic based on a false pretext that one is getting free shares in a share split, which is why some investors bid up the price.

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