Corporate actions are measures carried out by companies that result in a change in its stock price. An entity can pick from a variety of corporate actions. A clear picture of the company’s financial health can be obtained by analysing these business actions and deciding whether to buy or sell a certain stock.
When a firm plans to take corporate action, it has an immediate influence on the stock price. The directors of a firm make these corporate action decisions with the goal of boosting profitability and benefiting stakeholders. The company’s shareholders will also have to approve it.
A shareholder’s awareness of how corporate actions function and how they will affect the company’s share price and performance is critical. This knowledge will help shareholders decide whether to buy or sell a specific stock.
Types of Corporate Actions
It’s a company-wide event organised by the board of directors that affects all shareholders. Participation in these business actions is required. Bonus issues, mergers and acquisitions, stock splits, and spin-offs are all examples of required corporate acts.
- Mergers & Acquisitions
Combination of two or more companies, when one company offers securities in the acquiring company in exchange for the securities of the company being acquired. An acquisition occurs when a larger firm buys a smaller one in order to expand.
One of the biggest mergers in India – Vodafone Idea merger was estimated to be worth $23 billion.The acquisition benefited both Idea and Vodafone, since Vodafone now owns 45.1 percent of the merged firm, with the Aditya Birla group owning 26 percent and Idea owning the rest. On September 7th, Vodafone Idea launched its new corporate identity, ‘Vi,’ marking the conclusion of the two businesses’ unification.
A spinoff occurs when a firm forms a new independent company by selling or distributing additional shares of its existing business. A type of divestiture is a spinoff. A corporation creates a spinoff in the hopes of increasing its value as a separate entity.
Spin-offs have performed exceptionally well in India. According to SBI Capital’s survey done on the 154 spin off deals from 2002 to 2016, spin-offs outperformed the broader market indexes across market cycles. According to their research, spin-offs generate a 36 percent excess return above the Sensex.
- Bonus Issue
A bonus issue is a stock dividend distributed by a corporation to its shareholders. The bonus shares are issued from the company’s reserves. These are free shares that shareholders receive in exchange for shares they already own.
Bonus shares are issued by companies to stimulate retail involvement, particularly when the company’s price per share is extremely high and it becomes difficult for new investors to purchase shares. Issuing bonus shares increases the number of outstanding shares while decreasing the value of each share. The face value is unaffected.
- Stock Splits
The number of shares held increases when the firm declares a stock split, but the investment value/market capitalization stays comparable to the bonus issue. The stock is divided by its face value. If the stock’s face value is Rs.10 and it undergoes a 1:2 stock split, the face value will be Rs.5. If you had one share prior to the split, you would now have two shares.
A stock split, like a bonus issue, is frequently used to attract more retail involvement by lowering the value per share.
A shareholder must decide whether or not to join in a voluntary corporate activity. An answer must be provided to the company in order to process the activity. Right issues, share buybacks, and tender offers are examples of common voluntary acts.
- Buy Back
A buyback is a deal in which the corporation offers to buy back shares from current shareholders at a discounted price. It is done with the intention of reducing the company’s outstanding shares as well as the shareholders’ investment.
Companies can use a buyback to invest in themselves. If a firm believes its shares are undervalued, it may conduct a repurchase to compensate investors. The share repurchase reduces the number of existing shares, hence increasing the value of each one.
- Right Issue
Existing shareholders are given subscription rights to purchase more securities in a company before it is sold to the general public. The existing shareholders are given the option to benefit from the new development in the firm through a Right Issue, which is normally in the form of a Stock Split.
Reliance did this in a 1:15 ratio, which meant that for every 15 shares you owned, you could buy one extra share at a slightly reduced price.
A rights issue is simply a means of raising funds. The only difference is that the money comes from existing shareholders rather than new ones. This encourages shareholders to grow their position in the company by offering a discount on the more shares available.
In the instance of Reliance, shareholders were given one additional share for every 15 shares they had at a discounted price of Rs. 1,257 per share, despite the fact that the market price on the day of the issue was about Rs. 1,527 per share.
Mandatory with Choices
It is a required corporate action for shareholders, although they are offered numerous options to select from. A popular example is a cash or stock dividend payout with one of the options set as the default; the shareholder may or may not submit an election, but the default option will be used.
- Dividend Payout
Dividends are paid to the company’s shareholders. Dividends are paid to disperse a company’s profits throughout the year. Dividends are distributed per share.
Dividends are not required to be paid every year. If the corporation believes that instead of paying dividends to shareholders, it would be better to use the same funds to fund a new initiative that will benefit the company in the long run, they can do so.
Furthermore, dividends do not have to be paid solely from profits. If a corporation makes a loss throughout the year but has a significant cash reserve, it can still pay dividends from those funds.
Timeline to Understand Corporate Actions
This is the date of the AGM, at which the company’s board of directors approves the dividend payment.
This is the date on which the corporation decides to check the shareholders register in order to identify all of the dividend-eligible shareholders. The duration between the dividend declaration date and the record date is typically 30 days.
It is usually two business days before the record date. The dividend is only paid to shareholders who own the stock before the ex-dividend date. This is due to the fact that standard settlement in India is T+2. For all intents and purposes, if you wish to be eligible for a dividend, you must purchase the shares prior to the ex-dividend date.
Date of payment
This is the date on which the corporation mails the corporate action to the shareholders. This date is usually a week or more after the record date so that the corporation has enough time to guarantee that all those who are entitled get paid correctly.
- Corporate actions are decisions made by a firm that have a direct impact on the value of its stockholders. It is an occurrence that causes significant changes in a corporation and has an impact on its stakeholders.
- These can be monetary in nature, such as dividends, or non-monetary in nature, such as bonuses, rights, or stock splits.
- The company informs its shareholders about corporate actions.
- The promoters’ strong outlook is reflected in the buyback. This also shows the promoters’ confidence in the company’s prospects to the shareholders.
- Changing a company’s name/brand, mergers, acquisitions, spinoffs, and dividends are all examples of corporate actions.
- Corporate actions can be classified into three categories: (1) Mandatory (shareholders virtually have no choice about whether or not to participate); (2) Mandatory with options (the board of directors takes action but gives shareholders a choice); and (3) Voluntary (each shareholder decides if he will participate in the action or not).
Whenever the corporation announces a corporate action, the registrar notifies the registered shareholders.
Furthermore, comprehending different sorts of corporate activities is critical for understanding how corporate actions affect the stock market and, as a result, the shareholders. These acts could have a significant impact on stock prices and provide a wealth of information to shareholders about the company.