Reverse Split

Under the situation of falling price of a company’s share, the company may want to reduce the number of outstanding shares to prop up the market price per share. The reduction of the number of outstanding shares by increasing per share par value is known as a reverse split. For example, a company may have 1,00,000 outstanding shares of Rs 5 par value per share.

Suppose it declares a reverse split of one-for-four. After the split, it will have 25,000 shares of Rs 20 par value per share. The reverse split is sometimes used to stop the market price per share below a certain level, say, Rs 10 per share which is par value of most shares in India. The reverse split is generally an indication of financial difficulty, and is, therefore, intended to increase.