Financial Daily from THE HINDU group of publications
Monday, Apr 05, 2004
Financial Daily from THE HINDU group of publications Monday, Apr 05, 2004 |
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Stock Markets Markets - Stock Markets Capital reduction proposals lead to slump in stock price Krishnan Thiagarajan
PROPOSALS to reduce capital by companies involving setting off of accumulated losses against equity capital are happening more often now. They reflect the intention of the management to start business afresh on a clean slate. The reduction of capital is expected to reflect this reality and should in the normal course have little impact on the share price as the per share earnings remain unchanged. But a curious phenomenon is at work. Stock prices have been routinely settling at a considerably lower price after the record date for putting through the reduction in capital, mystifying many investors. Ask Mr S. Ramakrishnan, a savvy investor and shareholder of Centurion Bank who was intrigued by the recent price movements in the stock. Following a capital-restructuring proposal initiated in mid-2003, trading in the stock was suspended in end-January at the BSE. On January 23, 2004, the day prior to suspension of trading, the stock closed at Rs 21.55. One-and-half months later, on March 4, the trading in the stock resumed and closed on that day at Rs. 8.80. Asked about this difference in the stock price pre- and post-capital restructuring, Mr Shailendra Bhandari, Managing Director of Centurion Bank, said that he would not be able to comment on the market price. But he added that, "if you are asking about EPS (per share earnings) or book value, nothing has changed (post-capital restructuring)." As a part of capital restructuring, Centurion Bank had reduced the face value of its equity from Rs 10 to Rs 1 by cancelling Rs 9 per share. The reduction of capital, approved by the courts, left the number of equity shares of Centurion Bank unchanged. The only inference that can be drawn is that theoretically, the stock price should have remained unchanged after resumption of trading. Hence, the reason for the fall in the stock price can be attributed only to the "market factor". Early this year, Ester Industries, a Delhi-headquartered company making polyester films, which also put through a capital reduction proposal witnessed a similar price trend. In this case, the company reduced the face value of the equity shares from Rs 10 to Rs 5 each, without any change in the number of underlying equity shares. The stock was trading at Rs 32.35 on February 18, the day prior to suspension of trading. But when it resumed trading on March 24, the stock closed at Rs 19.10. Responding to this, Mr Pradeep Rastogi, General Manager - Finance and Accounts, said that it was difficult to understand the logic or rationale for the stock price declining after resumption of trading. He also added that no upper or lower circuit is fixed on these stocks on the day they resume trading. Clearly, this is a trend which cannot be ignored. Shareholders in some small-cap companies such as Timex Watches, Nucent Finance, Zenith and Cranex which have capital reduction proposals in the pipeline, may be in for a surprise in their stock price movements.
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