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Commentary

Stocks At Face Value Rs. 1 Only. Umm. Why?

SEBI recommends that all public companies should have a face value of Rs. 1 per share. (From DNA India)

In the first phase, said the primary market advisory committee of Sebi, all forthcoming IPOs be priced based on a mandatory Re 1 face value per share.

In the second phase, listed entities having shares with more than Re 1 face value be asked to bring it down to the uniform value.

What does this achieve? I don’t know. To be honest it will not reduce confusion because earnings per share is dependent on number of shares, and not face value per share. I think they should simply abolish face value completely. Number of shares = any number the company can choose, and whatever amount they issue it at becomes part of capital. No “share premium” account and that bull.

This is a very boring legislation and is of no interest to me. First it will not allow splits at all, and splits are efficient ways of keeping shares affordable. Second, bonus issues get more common which are PAINFUL for taxation calculations (new shares, price of 0, have to maintain multiple lots etc.) Finally, this introduces a whole new cost to nearly all companies and brings no added benefit.

For you as an investor this doesn’t mean much in terms of value either.

  • Modi says:

    >I do not understand what is purpose does the face value of a share serve? Can you run a small post on this? I think there might be some historical reasons for facevalue.

  • Nilesh says:

    >face value of shares denotes initial share capital.

    let assume a company issues 10000 shares at face value of 10 with a premium of 90 (price 100). and it holds back 90000 shares with it (90% owned by company and 10% in public)

    then it just mean that initial share capital put by original floaters was
    “total number of shares * face value” = 1 lakh * 10 = 10lakh Rs.

    now value of it has grown to “total number of shares x issue price” = 1 lakh * 100 = 100 lakhs.

    but yah this figure is NOT used in calculating any performance indicators of company (eps, pe, bv etc) so it is pretty much useless.

    Deepak, am i right ?

  • Anonymous says:

    >Based on what I know about shares and face value, should the company go bankrupt or shut down, then the money that the company would owe to its shareholder would be the face value of the share.

    The other significance, though it does not matter to investors, is that the dividend is always expressed as a % of share’s face value.

    Cheers,
    Sumeet

  • Deepak Shenoy says:

    >nilesh: You’re right, well said.

    sumeet: Not really. If the company shuts down it owes its Net Worth to the shareholders. Each shareholder gets a piece of hte networth according to his shareholding.

    If the company goes bankrupt shareholders get what is left after paying all creditors.

    None of the above has anything to do with face value (networth is not based on face value at all).

  • Nitin says:

    >I guess, it’s for the small investors so that they have a better idea on what really is the stock price. Many investors get misleaded by a small stock price in an IPO but with a FV of 1 which some times they fail to understand.

    Nitin
    my2dimes.blogspot.com