Corporate actions

Corporate actions

What Is Corporate Action?

Corporate action is an event initiated by a public company that brings a material change to the company or securities issued by the company which affects the holders of securities of the company such as shareholders and debenture holders.

Categories Of Corporate Actions:-

Corporate actions can be grouped into three categories which are as under:-

(1) Mandatory corporate actions:-

Participation of security holders is compulsory for these corporate actions. But the security holders do not have to do anything in mandatory corporate actions. Examples of mandatory corporate actions are dividend payment to shareholders, interest payment to debt holders, bonus issue of shares, mergers, acquisitions, spinoffs, stock split, reverse stock split, name change of company, etc.

(2) Voluntary corporate actions:-

Participation of security holders is not compulsory for these corporate actions. The security holders can decide whether they want to participate in the corporate action or not. A response from the security holders is required to process the corporate action. Examples of voluntary corporate actions are rights issue of shares, buy-back of shares, etc.

 (3) Mandatory with option corporate actions:-

Participation of security holders is compulsory for these corporate actions but they are presented with options. If a security holder does not submit his option to the company, the default option is applied. For example cash dividend or stock dividend with one of the options as default.

Types Of Mandatory Corporate Actions And Their Explanation:-

Following are the important types of mandatory corporate actions that are initiated by a Public company:-

Dividend payment:-

Dividend is the payment made by a company to its shareholders from the profits made by the company. When a company earns profit, it re-invests some part of it in the business which is called as retained earnings and distributes the remaining part of the profit to the shareholders which is called as dividend. Dividend can be equity dividend or preference dividend. Dividend paid to equity shareholders is called as equity dividend and the dividend paid to preference shareholders is called as preference dividend. The amount of equity dividend depends upon the profit made by the company. Higher the profit, higher is the amount of equity dividend. Whereas the amount of preference dividend is fixed. It does not depend upon the profit made by the company. The company has to pay preference dividend at a fixed rate or fixed amount irrespective of the amount of profit earned by the company. There are two main types of  equity dividend:-
(1) Interim dividend:-
Interim dividend is the dividend that is paid in between the two annual general meetings of the company before finalizing the accounts and preparation of final financial statements. Interim dividend is generally paid by the company when it has earned heavy profit during the year and wants to distribute some of it among the shareholders.
(2) Final dividend:-
Final dividend is the regular dividend paid by the company annually at the end of the financial year. It is proposed by the board of directors and approved by the shareholders in the annual general meeting of the company. Final dividend is paid after finalizing the accounts and preparation of final financial statements.

 Interest payment:-

Interest is the amount of fee paid by the borrower to the lender at a fixed rate for using the borrowed money. It is the cost of borrowing money for the borrower and the income from lending money for the lender. The company pays interest on the loans taken from various banks and financial institutions as well as on the debt securities issued such as debentures and bonds. Interest can be of two types:-
(1) Simple interest:-
Simple interest is the interest paid only on the principal amount borrowed. No interest is paid on the interest accrued during the term of the loan or debt security.
(2) Compound interest:-
Compound interest is the interest paid not only on the principal amount borrowed but also on the interest accrued during the term of the loan or debt security. The interest accrued on the principal amount is added back to the principal amount i.e re-invested and the whole amount is then treated as the new principal for the calculation of interest for the next period.

 Stock split:-

Stock split is a process where a company reduces the face value of its shares and issues proportionate number of new shares of the new reduced face value to the existing shareholders so that the proportionate holding value of shareholders remains the same. Stock split increases the number of outstanding shares of the company. The main objective of stock split is to make shares of the company affordable to small investors and to improve the liquidity of the shares in stock market. After stock split, the share capital and market capitalization of the company remains unchanged but the market value of shares reduce since the number of outstanding shares increase.
Example:- A company has 100000 shares outstanding and face value per share is rs 5. The market value per share is rs 100. The company is going to split the stock 2 for 1.
After the stock split, the company would have 200000 shares outstanding and face value per share would be rs 2.5 and the market value per share would be rs 50.
Suppose a shareholder owned 200 shares of that company before stock split at rs 100 per share and had shares worth rs 20000 (200*100). After stock split, he would own 400 shares at rs 50 per share. So he would still own shares worth rs 20000 (400*50).

 Reverse stock split:-

Reverse stock split is a process where a company increases the face value of its shares and issues proportionate number of new shares of the new increased face value to the existing shareholders so that the proportionate holding value of shareholders remains the same. Reverse stock split decreases the number of outstanding shares of the company. The main objective of reverse stock split is to prevent the company from getting delisted from the stock exchange because of low price of its shares. After reverse stock split, the share capital and market capitalization of the company remains unchanged but the market value of shares increase since the number of outstanding shares decrease.
Example:- A company has 100000 shares outstanding and face value per share is rs 5. The market value per share is rs 100. The company is going to reverse split the stock 1 for 2.
After the reverse stock split, the company would have 50000 shares outstanding and face value per share would be 10 and the market value per share would be rs 200.
Suppose a shareholder owned 200 shares of that company before reverse stock split at rs 100 per share and had shares worth rs 20000 (200*100). After reverse stock split, he would own 100 shares at rs 200 per share. So he would still own shares worth rs 20000 (100*200).

 Issue of bonus shares:-

Bonus shares are the free shares given by a company to its existing equity shareholders. They are given without any cost to the existing equity shareholders of the company in proportion to their current shareholding in the company. The issue of bonus shares is called as bonus issue. Bonus shares are issued by the company by using the free reserves which are accumulated by the company by retaining part of the profit over the years instead of paying dividend. When the company issues bonus shares, the reserves get converted into capital. After the issue of bonus shares, the share capital of the company increases while the market capitalization of the company remains unchanged but the market value of shares decrease as the number of outstanding shares increase. The total shareholding value of the shareholders will not increase after bonus issue but will remain the same.
Example:- A company has 10000 shares outstanding and face value per share is rs 10 and the share capital is rs 100000 (10000*10). The market value per share is rs 25. The company announces bonus shares in the ratio of 1:1 i.e 1 bonus share for each share owned by the shareholder.
After the issue of bonus shares, the company would have 20000 shares outstanding but the face value per share will remain unchanged which is rs 10 per share. The share capital of the company would be rs 200000 (20000*10) and market value per share would be rs 12.50.
Suppose a shareholder owned 100 shares of that company before bonus issue. Before bonus issue he had shares worth rs 2500 (100*25). After bonus issue, he would own 200 shares at rs 12.50 per share. He would still own shares worth rs 2500 (200*12.50).

 Difference Between Stock Split And Bonus Issue:-
Stock Split Bonus Issue
The same existing shares of the shareholders are split into two in stock split. Free additional shares are given to the shareholders over their existing shares in bonus issue.
After stock split the share capital of the company remains the same. After bonus issue the share capital of the company increases as the reserves are converted into share capital.
After stock split face value of the company’s share decreases. After bonus issue face value of the company’s share remains the same.
Mergers:-

Merger is also called as amalgamation. Merger is a process in which two companies of nearly equal size combine together to form a new company altogether rather than remaining separately owned and managed. Neither of the two companies survive independently. It involves the mutual decision of two similar sized companies to combine and become one company. After merger, both the companies shares are surrendered and new company’s shares are issued in their place.

 Acquisitions:-

Acquisition is also called as takeover. Acquisition is a process in which a larger company purchases another smaller company and clearly establishes itself as the owner. The purchased company no longer exists. The purchasing company is called as acquirer company and the purchased company is called as acquired company or target company. The acquirer company buys the equity shares and therefore control of the target company.

 Spin-offs:-

Spin-off is also called as spin-out. Spin-off is a process in which a company splits off sections or divisions of itself as separate business. The sections which are split off function as independent companies separate from the parent company.

 Types Of Voluntary Corporate Actions And Their Explanation:-

Following are the important types of voluntary corporate actions that are initiated by a public company:-

Issue of rights shares:-

Rights shares are the shares offered by a company to its existing equity shareholders at a cheaper price than the current market price of that company’s shares in the market. They are offered to the existing equity shareholders in proportion to their current shareholding in the company. The issue of rights shares is called as rights issue. The existing shareholders are given a specified time period within which they have to inform their decision to the company as to whether they want to subscribe to the rights issue or not. The shareholders may or may not subscribe to the rights issue. If some shareholders do not subscribe to the rights issue, their shareholding value would get diluted. After the issue of rights shares, the share capital and market capitalization of the company increases and the number of outstanding shares also increase while the market value of shares decrease.
Example:- A company has 50000 shares outstanding and face value per share is rs 10 and the share capital is rs 500000 (50000*10). The market value per share is rs 50 and the market cap is rs 2500000 (50000*50). The company has offered rights shares in the ratio of 1:1 i.e 1 rights share for each share owned by the shareholder and the offer price per share is rs 40.
Lets assume that all the existing shareholders accept the offer of rights shares. So after the rights issue, the company would have 100000 shares outstanding and the share capital of the company would be rs 1000000 (100000*10). The market cap of the company would be rs 4500000 (2500000)+(50000*40) and the market value per share would be rs 45 (4500000/100000*10).
Suppose a shareholder owned 100 shares of that company before rights issue at rs 50 per share. After subscribing to the rights issue, he would own 200 shares at the average buy price of rs 45 per share (50+40/2) which would be same as the current market price. But if he does not subscribe to the rights issue, his buying price would remain at rs 50 per share while the market price would be rs 45 per share. So he would be in a loss of rs 5 per share and his shareholding value would be diluted to rs 4500 (100*45) from rs 5000 (100*50) because of the extra shares issued.

 Buy-back of shares:-

Buy-back of shares is a process in which a company purchases its own equity shares either from:-
– Existing shareholders on a proportionate basis
– Open market through book building process or stock exchange
– Odd lot holders
The main objectives of buy-back are:-
– Increasing the promoters shareholding in the company
– Preventing takeover bids
– To achieve or maintain a target capital structure
– To increase the share value
– To pay surplus cash not required
The company can purchase its own shares by using either:-
– Free reserves
– Securities premium account
– Proceeds of an earlier issue of securities
After the buy-back of shares, the share capital and market cap of the company decreases while the market price of the shares increase as the number of outstanding shares decrease.

 

 

 

 

 

 

 

 

 

2 thoughts on “Corporate actions”

Leave a Reply

Your email address will not be published. Required fields are marked *