Stock splits gain momentum at PSX

Surge as bonus shares face tax burden; SECP's new guidelines boost trend

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KARACHI:

The Pakistan Stock Exchange (PSX) is witnessing a surge in stock splits as major companies seek to improve liquidity and investor participation. Recent approvals from the Securities and Exchange Commission of Pakistan (SECP) have made stock splits a more attractive option, especially compared to bonus shares, which now carry tax implications.

Leading firms such as Lucky Cement (LUCK), Arif Habib Corporation Limited (AHCL), and AirLink (AIRLINK) have announced stock splits to make shares more affordable and enhance market engagement. These developments position stock splits as a key tool for boosting trading volumes and stabilising stock prices.

"The stock splits are not just a numerical adjustment; they serve as a powerful tool to boost investor participation, improve liquidity, and enhance market stability," wrote Sana Tawfik, Research Head at AHL, in her report 'Market Strategy: Stock Splits Gain Momentum at PSX.'

PSX has seen renewed interest in stock splits, with key players leveraging this strategy to enhance market participation. In December 2024, the SECP approved guidelines on stock splits by listed companies. These guidelines, formulated after extensive stakeholder consultations, make stock splits a more viable financial strategy, particularly for companies with high share prices.

By increasing the number of shares in circulation, stock splits improve market efficiency and trading volumes while maintaining price stability—a win-win for issuers and investors.

Why splits over bonus shares?

Unlike bonus shares, which come with tax implications, stock splits offer a tax-efficient (almost free) method for companies to increase affordability and enhance market engagement.

The Finance Act 2023 reinstated tax on bonus shares, a move previously introduced in 2014 but removed in 2018. Companies issuing bonus shares must now withhold 10% of the issued shares, making stock splits a more attractive alternative. Lucky Cement announced a 5-for-1 stock split in a notice to PSX on February 21, 2025, following a board recommendation on February 20. Subject to shareholder approval at an Extraordinary General Meeting (EoGM) on March 18, the number of ordinary shares will increase from 293 million to 1.465 billion, while the pre-split stock price will be divided by five. Following the announcement, LUCK's stock price rose by 0.9%, climbing from Rs1,422/share to Rs1,435/share.

Arif Habib Corporation Limited has proposed a 10-for-1 stock split to boost liquidity and investor accessibility. The face value will be reduced from Rs10 to Rs1, with shareholders receiving 10 shares of Rs1 each for every 1 share of Rs10 held. The proposal awaits shareholder approval at an EoGM on March 19, with an effective date to be announced post-regulatory approvals. Since the announcement, the stock price has surged by 11.3%, rising from Rs80/share to Rs89.7/share.

AirLink announced a 5-for-1 stock split, effective February 28, 2025, to enhance investor accessibility and improve market liquidity. The par value of the stock will decrease from Rs10/share to Rs2/share, effective March 11. The number of ordinary shares will increase from 395.3 million to 1.976 billion. However, following the split, the stock price declined by 5.4%, falling from Rs187/share to Rs177/share. Three companies—National Foods Limited (NATF), Hum Network Limited (HUMNL), and Synthetic Products Enterprises Limited (SPEL)—have previously undergone stock splits, with varying impacts on their trading activity.

NATF was the first PSX-listed company to announce a stock split. It executed a 2-for-1 stock split, reducing the face value of its shares from Rs10 to Rs5. The company's average six-month trading volume before the split was 25,062 shares. Following the split, liquidity improved, leading to an increase in trading activity to 40,854 shares. HUMNL announced a 10-for-1 stock split in October 2014 after its stock price rose to Rs171.8. The split reduced the par value of shares from Rs10 to Rs1. Before the split, HUMNL's average six-month trading volume was 1.6 million shares. Following the split, liquidity improved significantly, increasing trading activity to 4.4 million shares. SPEL executed a 2-for-1 stock split, lowering the face value of its shares from Rs10 to Rs5.