Corporate actions are decisions made by publicly listed companies that can have a significant impact on their shareholders. These actions are approved by the company’s Board of Directors, shareholders, or both.
Corporate actions can affect the company’s stock price, ownership structure, or financial position, and sometimes all three. The nature and type of the action determine the extent of these changes.
Types of Corporate Actions
Mandatory Corporate Actions:
These are actions where investors don’t have a choice—they happen automatically, and all shareholders are affected.
- Stock Splits: If a company decides to split its stock, every shareholder’s shares are automatically split.
- Dividends: If a company declares a dividend, all eligible shareholders will receive
Voluntary Corporate Actions:
These are actions where investors have a choice to participate or not.
- Rights Issues: A company may offer existing shareholders the right to buy more shares at a discount, but investors can choose whether or not to buy them.
- Buybacks: If a company offers to buy back its shares, shareholders can decide whether they want to sell their shares back to the company.
In short, mandatory actions happen automatically for all shareholders, while voluntary actions require investors to decide if they want to participate.
Major Corporate Actions:
Dividend
After paying taxes, a company's remaining profits belong to the shareholders. The company can either keep these profits or distribute them among the shareholders, which is known as declaring a dividend. A company can declare an Interim Dividend during the year and a Final Dividend at the end of the financial year. Once declared, the company must distribute the dividend within 30 days.
Bonus Issue
A bonus issue is an alternative to a cash dividend, where a company issues additional shares (bonus shares) to its existing shareholders. The number of bonus shares each shareholder receives depends on their current shareholding.
Stock Split
In a stock split, the face value of existing shares is reduced in a specific ratio. Companies may split their shares if the stock price becomes too high, which can limit investor participation. After a split, the price per share decreases, increasing the stock's liquidity in the market.
Share Consolidation
Share consolidation is the opposite of a stock split. The company increases the par value of its shares in a specific ratio and reduces the number of shares accordingly. This action is taken when the share price is perceived to be too low, which can negatively affect investor perception. Post-consolidation, the share price increases, potentially improving the market’s view of the company.
Merger and Acquisition
Mergers, acquisitions, and consolidations are corporate actions that change a company's ownership structure. In a merger, one company absorbs another, and the acquired company ceases to exist. In an acquisition, one company buys a substantial portion of another company's stock, and both companies typically continue to exist. In a consolidation, two companies combine to form a new entity, and the original companies cease to exist.
Buyback of Shares
A buyback occurs when a company repurchases its own shares using its reserves and surplus. These repurchased shares are canceled, reducing the company’s share capital. For a company to be eligible for a buyback, it must not have defaulted on payments such as interest, principal on debts, or dividends.
Delisting of Shares
Delisting refers to the removal of a company's shares from a stock exchange. This can be either compulsory or voluntary. In a compulsory delisting, shares are removed due to the company’s non-compliance with regulations. In voluntary delisting, the company chooses to remove its shares from the exchange and go private.
Impact of Corporate Actions on Investors
Here's how these actions can influence investors, especially in the Indian stock market:
Financial Gain or Loss
Dividends:
When a company pays dividends, investors receive regular income. For example, if a company declares a dividend of ₹10 per share, an investor holding 100 shares will receive ₹1,000.
Stock Splits and Bonus Issues:
These actions increase the number of shares an investor owns without changing the total value of the investment. For instance, in a 2-for-1 stock split, if you own 100 shares priced at ₹500 each, after the split, you'll have 200 shares priced at ₹250 each.
Mergers and Acquisitions:
If a company merges with another or is acquired, the stock price may change significantly. For example, if Company A acquires Company B, the share price of both companies might rise or fall, leading to potential gains or losses for investors.
Voting Rights
Rights Issues:
When a company offers new shares to existing shareholders at a discount, it can dilute voting power. If an investor doesn't buy the new shares, their voting influence decreases. For example, if you own 5% of a company, but new shares are issued and you don't buy them, your ownership percentage and voting power may drop.
Portfolio Diversification
Spin-Offs:
When a company creates a new independent company from one of its divisions, investors receive shares in the new company. This allows them to diversify their investments. For example if Reliance Industries spins off its telecom business, you might end up owning shares in both Reliance and the new telecom company, each with different growth prospects.
Information Signals
Share Buybacks:
When a company buys back its own shares, it might signal that the management believes the stock is undervalued. For example, if TCS announces a buyback, it could indicate confidence in its future performance, which might positively impact the stock price.
The Bottom Line
Corporate actions can have a big effect on a company’s future and its stock price, so it’s important for shareholders and investors to stay updated. These actions usually need approval from the board of directors and sometimes from shareholders as well.
Corporate actions can be either mandatory or voluntary and can have positive or negative effects. Generally, actions like paying dividends, buying back shares, or other moves to increase shareholder value are seen positively, unless investors believe the company could have used its resources better. On the other hand, rights issues and liquidations are usually disliked by investors.
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