## Saturday, October 22, 2016

### Meaning and Definition:

When a company wishes to raise share capital it breaks down sum into a number of small sized units to make it affordable for people to buy or subscribe for the shares. This basic, broken down, unit value of a share is called its face value. It is also called the nominal value of the share.

In India it is common for companies to keep the face value of the share at Rs.10 and letter as the company grows and the market price of the share becomes very large, the face value is split into smaller sizes of Rs.5 or 1.

#### Example:

ABC Ltd. is planning to raise Rs.1000 crores (one crore is ten million) to set up a hydroelectric project. It has decided to break down the capital into Rs.10 a unit so that general public can easily buy. In this case ABC Ltd. will issue 100 crore shares of Rs.10 each. This Rs.10 is the face value of the share.

 Description Unit Quantity Face Value of Share Rs. per share 10 Number of shares issued Number in crores 100 Total Capital Raised Rs. in crores 1000

Practically shares are issued at a premium or discount to the face value and actually in this context the word face value becomes significant.

#### Example:

Let us assume that ABC Ltd. is already operating many hydroelectric projects successfully and its shares are already listed on stock exchanges and trading at Rs.900 apiece. Let us also assume that it is intending to raise the fresh capital for expansion and has decided to issue the share at Rs.800.

 Description Unit Quantity Market Price Rs. per share 900 Issue Price Rs. per share 800 Premium Rs. per share 790 Face Value of Share Rs. per share 10 Number of shares issued Number in crores 1.25 Total Capital Raised Rs. in crores 1000

A similar treatment is given if the shares are issued at a discount.

#### Example:

Let us assume that ABC Ltd. is a large government company already operating many hydroelectric projects and is the market leader but has been ailing and in losses but undertaking a major restructuring with the government help and its shares are already listed on stock exchanges and trading at Rs.9 apiece. Let us also assume that it is intending to raise the fresh capital for expansion and has decided to issue the share at Rs.8. The market believes that ABC Ltd. is going to make successfully restructure its operations and become a very successful and dominant player in the next five years and it’s share price is expected to grow to Rs.40 apiece by then.

 Description Unit Quantity Market Price Rs. per share 9 Issue Price Rs. per share 8 Discount Rs. per share 2 Face Value of Share Rs. per share 10 Number of shares issued Number in crores 125 Total Capital Raised Rs. in crores 1000

#### Conclusion:

The face value or nominal value of a share is the basic amount into which the capital of the company is divided irrespective of at what price the share may actually be sold. In India normally the face value is kept at Rs.10 and afterwards split into smaller denominations.