Will the new directive work? Photo: Amdadul Huq/Drik News

AS different face values "only mislead" investors, last month the consultative committee of the Securities and Exchange Commission (SEC) recommended the market regulator to set a uniform face value of stocks at Tk.10. The committee claimed that the investors often compared the prices of one stock with another although they did not have the same face value. For this, share prices, even of weak companies, often go up abnormally, ultimately upsetting the market, officials explained.
The committee recommended that the listed companies, whose annual general meetings (AGM) are closed, should split their share prices in upcoming AGMs. The committee, however, made a proposal not to split the per unit price of AIMS First Mutual Fund, the lone security with Tk.1 face value. How many people really get confused about the different face value "puzzle?" Before taking its decision, the committee didn't do any feasibility study on the impact of uniform face value on the Bangladesh stock market. How does the decision of uniform face value affect the market participants?
A stock split does not change the revenue or assets of a company. So, stock-split should cause no change in price other than the adjustment warranted by the split factor. There should also be no change in distribution of stock returns around ex-dates of stock splits. Ex-date refers to the date on or after which a security is traded without a previously declared dividend or distribution.
However, in different developed markets, for instance, Canada, Hong Kong, Sweden, Germany, and South-Africa, significant positive abnormal returns and increase in variance and volumes of trade have been documented around stock split announcements as well as ex-dates. Studies of US stock splits also reported the same. In the U.S., studies show that splitting firms experience about 7 8% excess returns during one year after the announcement of the stock splits. Professor Maloney and Mulherin shows that the ex-date positive price reaction is due to a temporary order imbalance caused by a surge of buy orders as new investors are attracted to the splitting stock.
Furthermore, share price volatility, as a measure of liquidity, has been shown to increase following a stock split. Researcher Ohlson and Penman find a change in volatility of around 28% subsequent to the ex-dates of stock split. The number of trades per day has also been found to increase following stock splits. Split also increase the bid-ask spread. Even if the spread remains the same after a stock split, shareholders will lose twice as much to the spread than before the split.
In practice, these spreads most likely would not double after the split, but they might increase by 20% or more. You could end up paying more to trade the stock. Besides, stock split could also negatively effect the composition of the ownership structure as the number of small shareholders increases after the split. Different researches find clear evidence that after a split institutional ownership increases rather than decreases. That means in the long-run, given Bangladesh's perspective, small investors' interest in the firm will be under threat due to the split. For the same reason, divergence in face value "only misleads" investors.
In February 1981, the Indian ministry of finance issued a guideline that denomination of equity shares be fixed uniformly at Rs.10, and that the denomination of the then existing shares other than Rs.10 be converted into denomination of Rs.10. In another guideline in January 1983, the Indian government clarified that denomination of shares of Rs.100 need not be changed to denomination of Rs.10, i.e. shares of all companies were required to be in denominations of
Rs.10 or Rs.100 only. Ever so, several companies converted the denomination of shares of
Rs.100 into that of Rs.10 on the grounds that it generated better liquidity, as also a higher value for the shares.
However, in March 1999, the Securities and Exchange Board of India (SEBI) decided, "with the objective of broadening the investors' base," to dispense with the requirement of standard denomination of Rs.100 or Rs.10 and gave freedom to companies to issue shares of any denomination -- but not below Re.1. Companies that had issued shares of the face value of Rs.10 or Rs.100 were also permitted to avail of this facility by consolidation or by splitting their existing shares. To reap benefits of splitting, a number of existing listed companies having denomination of Rs.100 or Rs.10 have split their stocks into different denominations, e.g., Re.1, Rs.2 or Rs.5, etc.
What was result of uniform face value in the Indian market? India has faced totally a different fate comparing to the split results found in different academic researches. The empirical evidence from the neighboring Indian share markets indicates that price and returns decreased significantly after the split. The volatility of the stocks increased after the split. Further, the split has led to a greater liquidity, which is measured by an increase in daily number and value of shares traded. The stock split has also increased the cost of trading the shares. At the end of the day, in India, the shareholder's wealth has declined after the splits. Though, in last decade, Indian stock markets have changed tremendously, in terms of market micro-structure, it still has similarities to our market to a large extent. So, Bangladesh could also face the similar consequence like India, i.e., our shareholders could also lose money because of the split through uniform face value.
Splits do, however, achieve the managerial objective of increasing the number of shareholders in the marketplace. Though stockholders' wealth had declined in the Indian market, stock split ensured substantial profit to all other players in the stock market, i.e. brokerage houses to government, except investors. Due to the increased number of share trading and higher bid-ask spread, brokerage firms will be able to make tons of money whenever their customers make buy or sell orders. Hence, to make tons of money, brokerage firms and interest groups recommend uniform face value in Bangladesh to attain stock split.
If stock split is still necessary, the SEC should recommend Tk.1 as the uniform face value instead of Tk.10 since fractionalisation beyond Tk.1 is not possible. If uniform face value is set at Tk.1, companies will not be able to play around by splitting the face value at regular intervals to increase price of their stocks. Moreover, SEC also needs to ensure that, like India, it won't play with the face value in the future. SEC also needs to assure the market that it won't go back to the past culture of different face value, i.e. consistency in decision is required.
SEC says that most of the investors are not savvy enough to compare stocks with different face values, and make wrong choices. Investment is an art. Small investors should seek investment advice from professional investment advisors, access to whom should be ensured by SEC. Meanwhile, SEC should focus on ensuring smooth flow of information to make the market friendlier to the small investors rather than imposing a uniform face value without feasibility study.
Whatever happens to the stockholders, brokerage houses in Bangladesh make a hefty profit. If SEC really cares about investors, it needs to do a study to find the impact of split in the stock market in Bangladesh. Otherwise, our shareholders could also lose money. The decision to introduce uniform face value demonstrates that regulatory bodies hardly care about small investors. Wasn't SEC created to preserve the interest of the investors rather than brokerage houses? Without any discussion with the respective interest groups, SEC's decision to ask listed firms to make a uniform face value of Tk.10 surely raises questions.

A.F.M. Mainul Ahsan is a PhD Student. Texas Tech University. E-mail: [email protected]