The company, explaining the objectives behind the move, said that it was for reducing the share capital that is ‘in excess of the operational needs of the company i.e. the company is over capitalised’ and to ‘enhance shareholder value and improve the Return on Equity’ by using the excess cash.

Elaborating on its proposal, the company stated that it would reduce the face value of the shares from Rs 10 per share to Re 1 per share and return Rs 9/share to each shareholder uniformly. The returned money would be a ‘tax-free deemed dividend’ and the company would pay the dividend distribution tax. There would be no change in the number of shares held by each shareholder and there would be no change in the shareholding pattern of the company. But there would be significant benefit to the shareholders in that the ‘share capital will reduce from Rs 136 crore to Rs 13.6 crore’.

The face value of the 1,35,992,817 shares would change from Rs 10 per share to Re 1 per share. The percentage of shareholding of CP USA would continue to be 51 per cent of the share capital and the local shareholders would continue to hold 49 per cent of the share capital as they do now.

What the company seeking to do is different from the conventional share split that may keep the share capital intact but would result in increasing the number of shares. But in the case of Colgate, the number of shares remains the same but their value would be slashed drastically. Hence the proposal is not a split of shares, it is only a reduction in the face value of shares from Rs 10/share to Re 1/share.

Explaining the reasons as to why it did not choose the share buy-back route to enhance shareholder value, Colgate Palmolive management had stated that such a course would be justified ‘if the shares are under-valued by the stock market; this is not the case for CP’.

Buy back also would be resorted to if the parent company wishes to increase its stake and reduce the local shareholding. But ‘CP USA has no intention of increasing its stake in CPIL at this time’. Moreover, in a buy back plan, not all shareholders will benefit uniformly unlike in the current proposal under which shareholders would be paid Rs 9 per share (being the reduced amount in share FV) as additional dividend uniformly.

Allaying investor fears as to whether the reduction in share face value would lead to reduction in dividend payout, the CPIL management stated that dividend payout was dependent on the business fundamentals and profitability of the company and CPIL has ‘consistently rewarded’ its shareholders with high dividend payouts of 90 per cent over the last 4 years and ‘there is no reason to change the dividend payout policy’ due to reduction of capital.

On the likely impact on share price, the company said share price was a reflection of the company’s business performance, future prospects and attractive returns and it was dependent on the supply-demand factors in the market.

CPIL has informed the NSE that it has acquired 75 per cent equity shareholding in Advanced Oral Care Products Pvt Ltd, Goa, Professional Oral Care Products Pvt Ltd, Goa and SS Oral Hygiene Products Pvt Ltd, Hyderabad, which are engaged in the manufacture of toothpaste. They have been manufacturing and supplying toothpaste to the CPIL for last several years.

The CPIL shares closed at Rs 388.55 in the BSE and at Rs 388.65 in the NSE on November 8 and the price has gone up by about 10 per cent since the proposal was announced in May, 2007.