What is consolidation of shares?
- Consolidation of shares is a corporate action where a company reduces the number of outstanding shares by combining the shares and increasing the face value. Consolidation of shares is also known as reverse stock split. The company notifies the shareholders through email before the stock consolidation.
Example scenario
- Mr A holds 10,000 shares at ₹10 each. In the case of a share consolidation in the ratio of 1:5, the 5 shares will be reduced to 1 share. The 10,000 shares will be reduced to 2000 shares. The number of shares reduces, but the overall value of the shares remains the same.
- Value of holdings before the consolidation of shares: 10,000 × 10 = ₹1,00,000
- Value of holdings after the consolidation of shares: 2000 × 50 = ₹1,00,000
- There are scenarios where the shareholder could be left with a unit of stock that is less than one full share due to the reverse stock split or consolidation of shares. These shares are called fractional shares. Since fractional shares don’t trade in markets, the company appoints a trustee to buy them. The trustee then buys back those fractional shares from the investors, and the proceeds are credited to the primary bank account.