What is consolidation of shares?

Post Date : March 3, 2025

What is consolidation of shares?

Consolidation of shares, also known as a reverse stock split, is a corporate action where a company reduces the number of its outstanding shares by merging multiple shares into one while increasing the face value per share. This process does not change the overall value of a shareholder’s investment.

Companies typically notify shareholders via email before executing a share consolidation.

Example Scenario

Let’s say Mr. A holds 10,000 shares of a company, each valued at ₹10. If the company announces a share consolidation in the ratio of 1:5, every 5 shares will be merged into 1 share.

           Before consolidation:

• Total shares: 10,000
• Price per share: ₹10
• Total investment value: ₹1,00,000 (10,000 × ₹10)
  
  After consolidation:
  • Total shares: 2,000 (10,000 ÷ 5)
  • Price per share: ₹50
  • Total investment value: ₹1,00,000 (2,000 × ₹50)

As seen above, while the number of shares decreases, the total value remains unchanged.

Fractional Shares in Share Consolidation

In some cases, a share consolidation may result in fractional shares, which are holdings that amount to less than one full share. Since fractional shares are not actively traded in the market, companies appoint a trustee to manage them.

The trustee typically buys back these fractional shares from shareholders, and the proceeds are credited to the investor’s primary bank account.

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