The word reverse split is used in 2 contexts – one in the running parlance and one in the stock exchange / equity market parlance.
In the running parlance it means running the second portion of the race FASTER than the FIRST portion. For example if you run 6 km in the first half an hour, and you run 7km in the second half of the hour (which means you did 13km in 1hr) you are supposed to have done a reverse split.
In the capital market / equity market, it is the reverse of split. If a company’s share (with say a face value of Rs. 10) is quoting at Rs. 7, the company may convert it into a Rs. 100 FV share. Thus if you held 1000 shares valued at Rs. 7, it will become 100 shares of Rs. 70. This is just an eyewash, and a stupid move from the shareholder point of view.
For the shareholder it adds NO VALUE at all.
Then why do companies do it?
Well, the regulators (in their unbounded, never ending fantastic wisdom) are capable of saying ‘shares below Rs. 20 will be delisted’….then such a move makes sense.
One more reason why a company could do this is to reduce speculation (sounds stupid, but if a share is quoting at Rs. 7 a lot of undesirable elements may start speculating…and create a poor image of the company.
There is no logic at all (for split or reverse split!)….but then who the hell said life is about logic?
Source:Subramoney.com