A stock split is a subdivision of the par value of the share. For example, if the par value of Rs.10 is sub-divided into par value of Rs.5, then it is a 1:1 stock split. The number of shares will double since the par value has halved. At the same time, the stock price will also halve so that the net wealth effect remains the same.

Why do companies take on splits? One of the reasons is to bring the stock within a more acceptable trading range. For example a stock with a par value of Rs.10 is trading at Rs.1200 in the stock exchange. If the par value of the stock is subdivided from 10 to 2, then there is more liquidity available in the market to the extent of 5 times. At the same time the stock price will come down to around Rs.240 and will give a greater comfort level to small and medium shareholders to buy these shares.

There are many companies which are wary about stock splits as they are keen to maintain their par value at Rs.10 and are not comfortable with a par value of smaller denomination. Also there is a limit to the amount of stock split that you can do. For example, a stock with par value of Rs.10 can at best split till a par value of Rs.1; not beyond that. That is why, even in the Wipro case we can see that there have been only two splits but umpteen number of bonus shares given. Let us now turn to the issue of bonus shares.