Wednesday, August 6, 2014

My article which came out in Kuensel, Share values slashed tenfold


Share values slashed tenfold 

By lowering prices thus, the exchange hopes to attract more small investors
RSEBL: Company shares traded in the country today would now be ten times cheaper with the royal securities exchange of Bhutan (RSEBL) slashing the face value of each share by ten times.
This means anybody owning 100 shares of any company listed with RSEBL will see their shares increase to 1,000.
RSEBL expects an increase in the number of shareholders in the country by enticing small investors to join the capital market.
The exchange’s chief executive officer Dorji Phuntsho said the idea was to bring down the price of shares, so that it is attractive to a larger number of people.  Reducing the price of shares will also improve liquidity, since the total supply of shares will increase in the market.
However, the value of shares in the market will remain the same, despite an increase in numbers. “It’s like slicing the same apple to more pieces, so that it can be shared among many people,” Dorji Phuntsho said.
When the price of shares decreases in the market, it will also have a psychological influence among investors to buy shares, as it has become cheaper, although the value does not change at all.
It is expected to create more demand for shares in the market, by reducing the price and increasing their total amount, so that there is more to sell and at cheaper rates.  However, it will depend on present shareholders, whether they would offload or sell their shares.
“When the prices of shares are higher, investors feel it’s unaffordable or expensive.”
A decade ago, shares of companies listed with RESBL were sold at a face value of Nu 1,000.  It was then reduced to the existing Nu 100 for the same purpose of increasing affordability and enticing new investors.
If a new company listed with the stock exchange decides to raise money by floating shares through initial public offers, it must accordingly price their shares at Nu 10.  The amount of premium, a company can add on the face value will also come down by the same extent.
This could mean a company would float a total of 35M shares to raise Nu 350M from the market.  Today, at a face value of Nu 100, a company floats only 3M shares to raise the same amount of money.
The local share market today has a total of 62,000 shareholder accounts.  However, since an individual investor can hold more than one account, the total number of individuals holding shares would be less.
The whole idea of increasing people’s participation in the share market should also be complemented through financial literacy, Dorji Phuntsho said.
T-bank’s chief executive officer, Tshering Dorji said, splitting of shares was prevalent in other places like India.
Companies today need not go through a lot of hassle in splitting the shares, as everything has been automatised.  Earlier, it came with a lot of manual work.
The royal securities exchange is also planning to introduce what is called a ‘lot system’. “We’ll be segregating shares into different lots, where each lot will include 100 shares,” Dorji Phuntsho said.
Investors, willing to trade less than 100 shares, will fall in the odd lot, while those willing to sell 100 shares will fall in the even lot.  Separate timing will be set for trading both odd lot and even lot shares.
This, Dorji Phuntsho said, will be done to prevent price manipulation in the market.  Two individuals, a buyer and a seller, could easily bring down the market price of share by drawing up an agreement.
However, when shares are traded in lots, such instances could be prevented, Dorji Phuntsho said.
There are 21 listed companies with the stock exchange today.  The market has a total of 68M shares with a total value of Nu 20.5B.  By bringing down the share price to Nu 10 from the existing Nu 100, the total number of shares will increase to 680M.
Contributed by Nidup Gyeltshen 

3 comments:

  1. Good news for many prospective investors. Everyone could participate in shareholding. Usually many can't buy shares as values are high coupled by high premium. National wealth would be spread thus. Appears good decision to me.

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    1. Thanks for reading, although i tried to be as objective as i can, i feel the same way too, it will increase people's participation in the stock market and make it easier for many to raise money through alternative means such as this, instead of conventional practices of borrowing from the banks

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  2. Stock split will appear promising only if we look into the number of stocks one holds with the same amount of money. Because the stock's total market capitalization would remain same. But this will be only how literate and someone having knowledge on such matter would look.
    Maximum people in general will be bothered by their prices. And when their market prices are reduced, they would look the company in which their money are invested with different view. They would hardly look into the no. of shares they own then. This may then lead people to relate share price fall with poor performance of the company. Then social capital of the firm will be disturbed leading them to a market situation of 'stock price volatility' where stock prices would increase/decrease at unreasonable magnitude. In the process, the company may lose what it has gained because then it will be very unlikely that prices would increase unless there will be policy interventions from government. But these things may not happen in Bhutan as volume of stocks traded is very low and also our stock exchange company i.e. RSEBL is also not that active like in other countries.
    But the intention behind this stock appears good. It is to increase participation of the public. And again I don't know how many current shareholders would sell off the shares that are with them.
    Anyway, nice post brother. This really deserves some deep analysis and researches. Thank you

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