May 03, 2009

life in financial markets: pointless 'face value'

Here is something I wrote (for the magazine I work for) recently on the lack of utility of the 'face value' or 'par value' concept in Indian companies' reporting and accounting requirements:


Should 'face value' (or 'par value') of a share be abolished altogether? One of the latest amendments to listing agreement mandated by the Securities and Exchange Board of India through a circular to the stock exchanges has bought back to focus the utility, or lack of it, of the 'face value' concept in companies' capital accounting and corporate actions.
After a very long delay, and in its latest amendment on 24 April, Sebi has removed the option for listed companies to declare their dividends in 'per cent' terms and has now mandated the sole use of 'Rs per share' format for dividend declaration. This will solve the long-standing problem of companies misleading investors of dividend declarations of several hundred 'per cent' on the face value. A 500 per cent dividend on a share with a face value of Rs 5 would be Rs 25 a share. If the market price is, say, Rs 2,000 then a 'Rs 25 per share' dividend declaration seems more transparent than a '500 per cent' one.
The Companies Act requires the mention of 'face value' per share by all companies but the way the capital markets have evolved it has become not only redundant but also almost purposeless. "It does not matter for the equity markets that use terms such as 'earnings per share' but technically the regulatory framework still requires the segregation of paid-up equity value into one with a 'face value' and the balance in a 'share premium' account," says Jamil Khatri, head of IFRS and global accounting standards at KPMG India.
Sebi needs to prod the ministry of corporate affairs to amend the Companies Act to do with the redundant 'face value' notion in accounting. "In most international markets the paid-up capital is shown in a single bucket," says Khatri. "In fact, a separate 'statement of shareholder funds' is mandated in those markets, but absent in India, that requires companies to detail all increase and decrease in issued share capital." Sebi should seriously require such disclosures from the listed companies whom it governs through the listing agreement norms.

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