A consolidation as the term refers to merging together existing shares according to a specific ratio, the company implement this operation as much as necessary.
How consolidation is done ?
This event is made by grouping together a number of shares in one single share. So 3 shares may be grouped or consolidated into 1, 10 to 1…etc.
Reason for consolidation ?
The reason is mostly the company trying to change access level for its shares or changing investors perception for the shares. An example would be a company that has shares traded at a price of 0.2 USD which is considered as a “Penny stock” category of shares. so the company will implement a consolidation, with a ratio of 100 to 1 to make its share price trade at 20 USD instead of 0.2 USD.
This is a very important concept that you need to know. The fractional shares or fractions are the shares that remained unconsolidated.
let’s take an example:
A company “XYZ” is having a consolidation with a ratio of 4 to 1 (4/1). What would happen if someone has 5 shares. He would have 4 shares converted to 1 but 1 remaining share cannot be consolidated. That share is called a “Fraction share”
How fractions are processed ?
The company would generally reimburse fraction shareholders in two ways:
1 – Ask them to pay in cash the amount necessary to get a correct ratio. In our case above (4/1). The shareholder would pay the equivalent amount of 3 shares, to have a total shares of 8, and then receive 2 new shares.
2 – Pay the value equivalent to the fractional share/shares to the shareholders in cash. In our case above, the shareholder would get the value of 1 share in cash
Effect on the share capital
This event does not have any effect on the nominal share capital of the company, the only thing that changes if the shares outstanding as well as the Par value (Nominal value) of the share
The key details to extract from this event would be:
- Number of shares before the consolidation
- Ratio: 1:10 / 2:10…
- Old Par value
- New Par value
- Number of shares after the event
- Listing details of the new shares issued after the event (ISIN, Label, Symbol)