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BIKER STOCK SWAP SPOOFS SUCKERS

On 11 August, Royal Enfield parent Eicher Motors announced a long-overdue stock split to increase its issued share volume ten-fold, a stratagem that proved to be spectacularly misunderstood and costly for some Indian amateur investors. BDN financial editor Roger Willis reports.  

The intention of such stock splits is straightforward. By exchanging ten new shares of the same combined face value for every old share, Eicher could facilitate much greater liquidity, thereby potentially broadening its shareholder base. Total market capitalisation and the worth of existing investment tranches would, of course, remain unaffected. The company’s formerly bloated shares would simply be denominated in thousands rather than tens of thousands of rupees henceforth.

This split went live when the Bombay Stock Exchange (BSE) opened for business on Monday 24 August. Eicher’s closing share price on the previous Friday afternoon, 21,702.40 rupees, had been translated into 2170.24 rupees at Monday morning’s bell. So far, so good.

Unfortunately, many small investors in India treat the BSE like a casino and the depth of their knowledge about equities complexity could be written on the back of a fag packet. They saw the new ticker price, smelt a bargain and piled in. As a result, Eicher’s value suddenly spiked skywards by more than 10% in early trading.

This phenomenon was inevitably short-lived. Professional speculators already armed with Eicher stock rubbed their hands in glee. A brief profit-taking bout ensued and the spike collapsed, leaving a lot of burnt fingers.

At Friday’s closing bell on 28 August, Eicher was valued just 2% higher than a week earlier, trailing the BSE Sensex stock index, which had risen by 2.7% over the same period.       

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