The Curious Case of Shekhawati Industries

Decoding financial gimmicks

The opposite of a stock split is reverse stock split or, if I am to use a more fancy term, stock consolidation. This is not very common and companies normally tend to do this when their stock price is too low (say below Rs 10), and they want to artificially increase their stock price so that it does not look too low to potential investors.

Why? Well, remember that penny stocks, as they are called, are considered risky by virtue of their low stock price. Also, a very low stock price may indicate investors that the company may not be performing well. So, in an attempt to “course correct” their image, several companies may opt for a “reverse stock split”.

For eg, if a company opts for a reverse stock split in the ratio of 2:1, then the number of stocks outstanding in the market halves, but the stock price doubles. In effect, the value of your stock holdings remains the same. You, the investors, do not gain or lose anything. What this means is that a reverse stock split, much like a stock split or a bonus issue, does not benefit you.

Last week, a Rs. 300 crore company called “Shekhawati Industries” announced a reverse stock split. Guess what? Not surprisingly, its current stock price is below Rs 10 (i.e. Rs 8.69) as of this date.

Now.. I was going through its financials (specifically, its income statement) and noticed this: