Varying par value of stocks: Between corporate freedom and market transparency

Dr. Dr. Abdulhakim bin Abdullah Al-Kharji

With the development of the Saudi capital market and the expansion of the base of listed companies, it has become noticeable that some companies adopt a different nominal value for shares than usual, as some companies offer their shares with a nominal value (1 Riyal), while the majority still have a nominal value (10 Riyals). Although this diversity reflects legislative flexibility aimed at enabling companies to diversify their financing tools, it raises legal and investment issues that affect the principle of transparency and clarity of information for investors.

Dr. Abdulhakim bin Abdullah Al-Kharji

First: The importance of par value

Par value is not just a number, but a basic accounting unit that reflects part of the company's capital and is based on several financial indicators, such as earnings per share and earnings per share, and is a basic reference in determining distributions, reserves and the amount of paid-in capital.

First, the importance of par value.

Second: Negative effects of varying par values

1. Misinterpretation of the market price

A novice investor may be attracted to a stock priced at 12 riyals, thinking it is undervalued, without realizing that its par value is 1 riyal, while ignoring another stock priced at 19 riyals with a par value of 10 riyals, even though the latter has a lower market value

2. Lack of awareness and adequate disclosure

Many trading platforms do not clearly show the par value, which impairs the investor's ability to evaluate the stock according to its financial fundamentals.

3. Unfairness between companies

Companies with a lower par value enjoy artificial price attractiveness, even though a company's strength is measured by its financial statements and not its stock price alone.

Third: Legal Vision and Regulatory Proposals

The principle of equality of opportunity between companies and traders requires the standardization or regulation of the par value standard.

According to the disclosure and transparency policies stipulated in the Capital Market Law and CMA regulations, it is the duty of the competent authorities to clarify all factors affecting the investment decision, including par value.

Fourth: Practical Recommendations

1. Unify the nominal value of listed stocks, whether to be 1 riyal or 10 riyals.
2. Or require trading platforms to display the nominal value of the stock next to the market price.
3. Launching awareness campaigns for investors to explain the difference between par value and market value and its impact on their decisions.

The freedom of companies to determine their financial structure is legitimate and required, but this should not be at the expense of clarity of information and market transparency.

If the primary mission of the financial market is to "enable informed investment", then fair regulation of par value is one of the doors to achieving this mission and ensuring the integrity of the market.

@Dr_alkharji