Corporate Action
What is Corporate Action and how is it used by companies?
A Corporate Action can broadly be referred to as an activity that has the potential to impact the wealth of the shareholders or to significantly impact the Equity and Debt of the company. These activities could be proposed by the company for multiple reasons like:
To change the price range and liquidity of the shares
To raise additional capital from market
To change Capital Structure of the company
To execute a business strategy
To satisfy regulatory requirements
Etc.
As explained on this page, there are different types of Corporate Actions that a company could undertake for the benefit of the shareholders. Before some of these activities can be conducted by the company, it is important to get an approval from the shareholders and the Board of Directors.
List of Corporate Actions
Many Corporate Actions can directly impact the trading price of the shares. So, when a company announces a Corporate Event, it has to be disclosed to all the shareholders (Refer: How to check corporate announcements of your shares?). Below, we give a list of the most popular Corporate Actions and the reason for implementing them.
Dividend Issue
A Dividend payment is a method for the companies to distribute some of the profits to the shareholders. This payout could be in the form of a Cash Dividend or a Stock Dividend. This is issued in proportion to the shares that are currently held by the investor.
In case of a Cash Dividend, the shareholders directly receive money in their Bank Account. Whereas in case of a Stock Dividend, the shareholders receive additional shares. The distribution of new Dividend shares is similar to how the shares are given out in a Bonus Issue.
Bonus shares
In case of a Bonus Issue, the company distributes additional new shares to the existing shareholders. This new Equity is issued for free and it is in proportion to the shares that are held by the investor. This technique is used by companies for increasing the liquidity of their shares in the market.
Example: If a company has announced a 5:1 Bonus Issue, then it would mean that 5 new shares will be issued for every 1 share that is currently held. So, if an investor had 100 shares before, then he/she would own a total of 600 shares after the Bonus Issue.
Stock Split
A Stock Split is a Stock Corporate Action in which the existing shares of a higher Face Value, are replaced with new shares of a lower Face Value. This technique is used by the companies to increase the number of shares that are trading in the market.
Just before the Split Date, the old shares are debited from the Demat Account of the investor and the new shares are simultaneously credited to the account. Since the number of shares will increase, the stock price will drop in proportion to the Stock Split ratio.
Example: Suppose that a company has announced a 5:1 Stock Split, where 5 new shares of INR 2 Face Value will replace 1 existing share of INR 10 Face Value. So, if an investor held 100 shares, then these will be debited from the Demat Account and 500 new shares will be credited. Also, the trading price of the stock will become 1/5 of the price at which the stock was trading before the split.
Reverse Stock Split
In a Reverse Stock Split, the companies reduce the number of shares that are trading in the market. This is done by replacing the existing shares of a lower Face Value, with new shares of a higher Face Value.
As the name would suggest, a Reverse Stock Split is the opposite of a Forward Stock Split, that has been mentioned above. Since the number of shares will decrease, the stock price will increase in proportion to the Reverse Split Ratio.
Example: Suppose that a company has announced a 1:2 Stock Split, where 1 new share of INR 2 Face Value will replace 2 existing shares of INR 1 Face Value. So, if an investor held 500 shares, then these will be debited from the account and 250 new shares will be credited. Also, the trading price of the stock will become 2 times the price at which the stock was trading before the Reverse Split.
Rights Issue
A Rights Issue is a technique for the companies to raise additional capital, by offering new shares to the existing shareholders. These new shares are offered in proportion to the shares that are currently owned by the investor.
First, the details of the shareholders and the number of shares held by them will be recorded. After that, Right Entitlements will be credited to the Demat Account of these shareholders. These will be in proportion to the shares that were initially held by the investors. For the next few days, these Entitlements can be freely traded on the Stock Exchange.
The investors will also get few days to submit the application form for subscribing to the new shares and to make the relevant payment to the company. After the application close date, the Right Entitlements will be debited from the account of all the investors and new shares will be issued to the successful applicants.
Share Buyback
A Stock Buyback refers to a Corporate Event in which companies buy their own shares from the market. This buying could be done at a fixed price (through a Tender Offer) or it could be done by continuous, regular buying of shares from the open market. The purchased shares are then cancelled by the company.
To buy the shares, the companies usually utilize the profits that were generated from the business. When shares are purchased from the market, the total number of shares of the company will get reduced.
So, this is a technique for rewarding the shareholders because the stock price might increase because of the buying. Since the purchased shares are extinguished, the ownership interest will increase for the shareholders who do not sell their shares in the Buyback.
Merger and Demerger
The Merger and Demerger are very complex Corporate Actions that are usually done for strategic reasons. In case of a Corporate Merger, 2 or more business entities are combined to form 1 business entity.
And as the name would suggest, a Demerger is the opposite of a Merger and 1 business entity could be split into 2 or more business entities. Alternately, a part of the business could be broken away and set up as a new entity (also known as a Spin-off).
Depending on the situation and the corporate structure, there are different ways to execute these transactions. Usually, there is a Share Swap involved, where the existing investors might get new Equity shares.
Acquisition / Buyout
In case of an Acquisition, a company purchases a majority stake in another company. This type of corporate activity is also known as a Buyout and it could be done by a company for multiple reasons like: increasing sales, expanding the market reach, acquiring new product lines, Forward Integration, Backward Integration etc.
As per regulatory requirements in some regions, when the acquiring company purchases a large stake in the target company, then the acquirer will also need to give an exit option for the shareholders of the target company.
This is usually done through an Open Offer, where the acquirer will give the option to the shareholders of the target company to sell their shares to the acquirer, at a pre-determined price.
Public offer / Tender offer
A Public Offer is a type of corporate transaction in which a company buys/sells the shares directly from the market. This could be done for reasons like: Raising capital, regulatory requirements, Mergers and Acquisitions etc.
When an entity is acquiring shares in a target company, it could come up with an Open Offer for all the shareholders of the target company. The shareholders could then choose to sell their shares at a pre-determined price.
On the other hand, a company could also decide to sell the shares (or bonds) in the open market, through a Public Offer. This sale could be done to the entire public or to some selective institutional buyers.
Other Corporate Actions
The transactions mentioned above can directly impact the Equity and Debt of the company. Besides these common transactions, there could be other types of intangible changes that could be made to the business. Some examples of these activities are:
Changing the name of the company
Changing the brand / logo
Changing the Stock Symbol
Etc.
These types of activities can also be categorized as Corporate Actions and they could impact the shares that are trading in the market. Also, these changes could affect the wealth of the shareholders in the long run. Although these activities cost the company some money, but these transactions are not exactly financial in nature.
Record Date in Corp Action
One of the most important decisions in a Corporate Action is to figure out the shareholders who will be eligible to participate in it. The shares are usually traded very frequently on the Stock Exchange and the stock ownership also changes quickly.
So, there are usually two important dates that are notified with the Stock Corporate Actions: Record Date and Ex-Date. On the Record Date, the company will finalize the list of shareholders that are eligible to receive the benefit from the Corporate Action.
When shares are purchased from the Stock Exchange, it can take some time to complete the Settlement Process and to transfer the ownership of the shares. The investor should have ownership of the shares on the Record Date, if he/she wishes to participate in the Corporate Action.
Ex-Date in Corp Action
In order to get the ownership of the shares in time, it is important for the investor to purchase the stock, much before the Record Date. This is where the Ex-Date will come into the picture because it will communicate the cut-off date for being eligible for the Corporate Action.
If the stock of a company is purchased on the Ex-Date (or any day after that), then the investor will get the ownership of the shares after the Record Date. So, in this case, the investor would not be eligible to participate in the Corporate Action.
The Record Date and Ex-Date are closely linked to each other and if either one of them is known, then it is easy to determine what the other date would be.
Disclaimer
- This page is for education purpose only
- Some information could be outdated / inaccurate
- Investors should always consult with certified advisors and experts before taking final decision
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