The Secondary Market Advisory Committee (SMAC) has been set up by SEBI as a standing committee to advise on matters relating to secondary market. The committee was reconstituted under the Chairmanship of Dr.R.H. Patil, Chairman, CCIL. The committee has deliberated on the following issues:

• Frequent change of face value of shares by listed companies
• Frequent change of names by listed companies.

The report based on the recommendations of the committee is placed on the SEBI website (www.sebi.gov.in) for public comments. The comments on this report may please be forwarded to Shri V.S. Sundaresan, Deputy General Manager, SEBI or may be emailed to sundaresanvs@sebi.gov.in on or before January 07, 2004.

The SMAC in its meeting held on October 9, 2003, discussed the following issues:

• Frequent change of face value of shares by listed companies.
• Frequent change of names by listed companies.

The deliberations and the subsequent recommendations of the SMAC on the aforesaid issues are as follows:-

1. Frequent change of face value of Shares by listed companies

1. The equity shares of listed companies were originally required to be offered to the public in uniform denomination of nominal value of Rs.10/-. This nominal value of Rs.10/- was referred to as the par value of shares and provided the benchmark for determining premia and discounts. The Ministry of Finance, vide circular no. 1/7/SE/81 dated January 22, 1983, had stipulated that equity shares which are in denominations other than those of Rs. 10/- or Rs. 100/- should be converted into those of Rs.10/- or Rs.100/- before December 31, 1983.
2. In 1999, it was decided to do away with the concept of fixed par value of Rs. 10/- and give freedom to the companies to issue shares in denomination, to be determined by them in accordance with the provisions of the Companies Act, 1956. The consideration behind the decision were as follows:-

• It was felt that in many cases, the net worth of the companies did not justify the minimum face value of Rs. 10/- and with a subsequent decline in the stock prices of the company, the investors had to suffer a loss.
• The dispensing with the par value concept of shares and giving the companies an option to fix the minimum face value for their equity shares would enable valuation of companies by their real net worth.
• The investors also would be benefited as they would not be forced to pay an artificially higher price for the shares.
• Such a measure would help increase the investor base and thus deepen the market.

3. Accordingly, SEBI vide circular No. SMDRP/Policy/Cir-16/99 dated June 14, 1999, modified the Central Govt. circular no. 1/7/SE/81 dated January 22, 1983, and provided for the following:

1. The companies given the freedom to issue the shares in any denomination to be determined by them in accordance with section 13(4) of the Companies Act, 1956. However, these shares would not be issued in decimal of a rupee.
2. The companies which seek to change the standard denomination may do so after amending the Memorandum and Articles of Association.
3. The existing companies which have issued Rs. 10/- or Rs. 100/- may also change the standard denomination into any denomination other than decimal of a rupee by splitting or consolidating the existing shares after amending their Memorandum and Articles of Association.
4. Only those companies whose shares are dematerialized shall be eligible to alter the standard denomination.

3. It has since been observed that many companies thereafter have split the face value of shares. While this splitting is in accordance with the provisions of the aforesaid circular, it was observed that several companies were resorting to frequent splitting and consolidation, within a short span of time. Such frequent changes have caused confusion amongst the investors as to whether the market price of the shares is based on the pre-split or post-split or post-consolidation. The analysis and comparison of the movement of share prices of such companies vis-à-vis those of other companies in a similar sector, becomes difficult under such circumstances. Further, as dividend is also declared as a percentage of the face value of the shares of the company, frequent changes of the value of the shares by way of split and consolidation results in the investors being often misled by a high dividend rate and also creates confusion in the calculation of return/pay-out from the company. For example, a company may declare 100% dividend on face value of Re.1/- per share while another company may declare 10% dividend on the face value of Rs.10/- per share. In such a situation, though the percentage of dividend may vary, the actual dividend receipt in the hands of the investor is only Re.1/- in both the cases. This gives an illusion of high dividend in the minds of the investors. The practice of frequent splitting and subsequent consolidation of the face value of shares is not a healthy practice and runs contrary to the spirit of the circular. Rather than being a facilitating measure to help the investors and increase the depth of the market, such splitting goes against the interest of the investors.

1. No listed company whose average market price in the previous six months is less than Rs. 500 per share can split the value of its equity share.
2. If the company has gone in for split or consolidation, it would not be permitted to split or consolidate the value of its equity share for a period of three years from the date of the last split/consolidation.
3. The change in the par value (i.e. split or consolidation, as the case may be)will have to be disseminated through the web sites of the Stock Exchanges and through EDIFAR for a continuous period of one year, from the date of last split/consolidation.
4. This would be in addition to the conditions stated in SEBI circular dated June 14, 1999 referred to at Para 3 above.

1. Frequent change of names by listed companies

1. In terms of Section 21 of the Companies Act, 1956 a company may, by special resolution and with the approval of Registrar of Companies change its name.
2. It has been observed that some companies change their names frequently, although it may not reflect the correct business profile of the company. It was felt that such a practice was being adopted to exploit and make the most of the boom in the certain business sectors in the market. Such a practice was particularly observed during the period of the IT boom, when many companies changed their names to include "software, InfoTech, Infosys e.t.c.", though the company was not a player in the IT sector. In order to counter the aforesaid practice, SEBI, vide circular No. SMDRP/Policy/Cir-8/99 dated April 26, 1999 has stipulated that companies which change their names suggesting any new line of business shall disclose the turnover and income, e.t.c., from such new activities separately in the quarterly/annual results required to be submitted/published in compliance with the provisions of the Listing Agreement. The Stock Exchanges have also been advised to amend the clauses 32 and 41 of the Listing Agreement accordingly. Subsequently, the Department of Company Affairs issued a circular No. 6/99 dated May 13, 1999, in terms of which, the Registrar of Companies have been mandated to ensure that the change of name by a company is allowed only if a substantial portion of the income of the company (as reflected from their audited accounts or accounts certified by a Chartered Accountant) is derived from that particular business segment.
3. In addition to the above, the Stock Exchanges on their own have also stipulated that companies which are desirous of changing its names should satisfy the following pre-conditions for approval of such a name change:

• Submission of certificate of incorporation, subsequent to the name change

• Submission of detailed reasons for name change as submitted to the RoC for obtaining its fresh certificate of incorporation

• Submission of the printed specimen for stickers

• Clearing the arrears, if any, in the listing fee

• Submission of a declaration to the Exchange that the share certificates not being corrected with the new name of the company shall also be good delivery in the market

• Submission of a declaration that the company will also affix the stickers bearing the new name of the company as and when the security certificates are lodged with the company or with its transfer agent for transfer, split, consolidation, etc.