Nestle India split its stock in a ratio of 1:10 on Jan 05. Each share of a whopping ₹27,000 converted into ten shares of ₹2,700 each. At ₹2,700, the shares became a lot more attractive to a larger set of investors, especially retail investors. The move will perhaps improve the stock’s liquidity. A liquid stock is always preferred by serious long-term investors.

That begs a question – why can’t MRF consider a split? After all, a single MRF share is trading at around ₹1.3 lakh. Let’s explore.

Splits are usually announced in the ratio of 1:5, 1:10, or 1:20. Given the size of each share, MRF will need a big split. Could that be 1:10 or 1:20?

MRF shares have a face value of ₹10. A split of 1:20 would bring the face value down to ₹0.5. That is not a whole number, and the face value cannot go below 1. So, let’s say they split in the ratio of 1:10, just like Nestle India did.

A 1:10 split would result in a face value of ₹1. No problem there. However, the market value of each share would be ~₹13,000. It could be higher as the share price generally rallies when a split is announced. At ₹13,000, It will still be an expensive share for most, defeating the purpose.

How about a bonus of 19 shares for every MRF share? It will increase the base equity share capital from ₹4.2 Cr to ₹84.8 Cr. MRF has enough free reserves for this. The bonus would divide the share price by 20. It would still be around ₹5,500. That, again, is a very high price.

Could there be a 1:39 or 1:49 bonus? Meaning, 40 or 50 shares for every share held. That level of dilution is unheard of. But why would MRF want to do a split or bonus? And why haven’t they already done it?

Splits or bonuses are said to improve liquidity. The number of outstanding shares increases, and the share price becomes more accessible to retail investors. It enables a higher trading activity. Therefore, price discovery is believed to become more efficient.

What if the company does not want a higher trading activity? It might want only long-term investors. A high price point could ensure that only serious investors buy the stock and that haphazard trading does not drive market value far away from the business’s intrinsic value.

This is why Warren Buffet resisted diluting Berkshire Hathaway’s shares for the longest time. Berkshire’s Class A shares are worth around $550,000 or ₹5 Cr/share. There have been calls for a split in Berkshire’s shares since 1990 when the per-share price breached the $10,000 mark.

Around the mid-1990s in the US, unit trust funds cropped up. The per unit price of these funds was far lower than Berkshire’s shares. They would either mimic Berkshire’s portfolio or invest in only Berkshire’s shares and sell their own units against it. It is like a mutual fund that will invest only in Berkshire’s shares. Investors were led to believe that these funds could deliver a performance similar to Berkshire’s. 

Warren Buffett knew that mimicking portfolios does not result in mimicking performance. To avoid the creation of such structures, Berkshire introduced the lower-priced Class B shares that carried 1/30th of the voting rights. The Class B shares have subsequently been split further, but Class A shares have never been split.

What if MRF was put in a similar situation? Could there be a fund investing only in MRF? In that case, would MRF split or introduce a newer class of shares?