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Under the UK Companies Act, a share must have a par or nominal value, e.g. 100 pence ordinary share. Authorised capital is the nominal or par value of the maximum number of shares the company may issue without seeking further shareholder approval.
A company can increase the number of shares already in issue by for example decreasing the par value from 100 pence to 25 pence through a process referred to as 'share splits'. Typically the reason companies carry out share splits is to improve the liquidity of a share if the share price is considered too expensive.
Alternatively a share consolidation or reverse share split can be used to increase the value of the share. Share consolidations are used as a means of making a share more attractive to institutional investors who consider penny shares too volatile. For example, if a company with 25 pence shares has a one for four consolidation, the par value would rise to 100 pence. The number of ordinary shares issued would fall to one quarter of the previous level, and the share price, earnings per share and dividends per share would rise by a factor of four but the P/E ratio and yield would be unchanged.
The implications of a share split or consolidation are:
- For a share split the number of shares that you own are increased and for a reverse share split or consolidation the number of shares that you own are decreased, however the total value of your shareholding remains constant. For example if you own 1,000 ordinary shares in Company ABC plc which were trading at 500 pence before a 2:1 share split (two for one share split i.e. for every one share you own, you get two shares), after the split you would own 2,000 ordinary shares worth 250 pence each.
- The market price of the shares is re-adjusted in proportion to the split. For example if a share was trading at 800 pence and there was a 4:1 share split, the re-adjusted price would be one quarter of the original price, therefore 200 pence. Alternatively if there was a reverse share split a share trading at 25 pence before a 1:10 split would have a re-adjusted share price of 250 pence
- Per Share ratios such as Earnings per share, Dividends and Asset values per share are restated in proportion to the split, however a split does not affect for example P/E ratios, yield and market capitalisation.
- There would be no financial impact on the company, other than administration fees, because there are no cash flow changes involved in executing a share split.
- If a stock split results in fractional shares the fractional share is typically sold off either to the benefit of the company or as cash paid to the investor. For example if you own 100 shares currently trading at 10 pence, if there is a 1:3 reverse split after the split you would receive 33 shares with a re-adjusted value of 30 pence plus a fractional one third of a share. The fractional share would typically be sold at a value of 10 pence i.e. 1/3 of 30 pence.
- The split / consolidation are treated as a share reorganisation for capital gains tax purposes, with the base cost of the existing shares apportioned between the new shares. The new share issue is not treated as an accquisition and the loss/alteration of existing shares is not treated as a disposal.
Managing Share Splits & Consolidations using timetotrade
timetotrade's portfolio management tools include a Share Reorganisation wizard. Just input the share split and timetotrade will automatically update your portfolio and make the necessary adjustments to your base cost for Capital Gains Tax calculations.
To enter a share reorganisation into timetotrade, follow the general instructions defined on the Share Reorganisation page. This section discusses how to enter specific details relating to share split and consolidation entries.
When managing share splits or consolidations you are typically told the ratio of old to new shares, or the number of news share received as a result of a split, or the number of shares cancelled (removed) as a result of a share consolidation.
You can use timetotrade to either enter the ratio of old to new shares such as a 3:1 split or a 7:9 consolidation as illustrated:
Alternatively you can enter the number of shares received or cancelled by entering a positive number (e.g. "300") or negative number (e.g. -"300") into the shares issued text box as illustrated:
Typically Fractional Shares are not issued or cancelled when reorganising UK companies. If fractional shares are not received leave the default 'Fractional Shares' drop down menu at 'No' as in "No fractional shares were received". Alternatively if you did receive fractional shares, change the fractional shares drop down menu to 'Yes'. Sometimes after a consolidation investors may receive a fractional cash payment in lieu of fractional shares. Any fractional share payment should be entered into the cash received text box in UK Pounds, Euro, US Dollars and not pence or cents. The following screen shot provides an example of a 7:9 consolidation with £2.50 cash received from the sale of a fractional share:
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