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Value of consolidation

india Updated: Nov 21, 2007 21:40 IST
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Most investors are familiar with the process of splitting up of shares by a company as it reduces the face value of its shares. In such a situation the quantum of an investor's holding changes due to the company's action, but the value of the holding remains the same. There is another procedure called consolidation of shares that involves a specific process. But not many investors are familiar with this concept.

Reverse of a split

Consolidation is the reverse of a share split. This means that under the process the shares of a lower face value are converted into shares of a higher face value, due to which the number of shares that are held by an individual will reduce. For example, if an investor holds 1,000 shares of a company with a face value of Rs 5 and these are consolidated to a face value of Rs 10, then the investor will end up having only 500 shares in the company at the end of the exercise.

Same value

The important thing that the individual has to understand is that the total value of the holdings in his possession remains the same. This results in a situation where the share price will change to take into consideration the impact of the change in the face value, as a result of which the investor finds that at the end of the entire exercise the total value of the holdings remains the same. It is only the price movement after this time period that will determine the extent of the change for the investors in terms of gains or losses in the value of investment.

Better price

In consolidation of shares the price of the share being traded goes higher and this often sends out a specific signal to investors. This is certain when the face value is not the normal Rs 10 per share, whereby the actual traded price of the share can go quite low. Once this is consolidated, then the price will be higher. While at the actual level this might not make any material difference to the investor, it is often used as a signaling tool by companies to shore up the value of their shares. As this (higher value) is more of an illusion than fact, the investor should not get carried away by these signals unless the performance of the company improves.

Rarely used

In India, this kind of exercise is not very common though there have been companies that have undertaken consolidation of their shares. It provides a different kind of situation for the investors and for them all such movements hold little impact as long as the investments and the company performs well.

(The writer is a Certified Financial Planner)