5 Types of Corporate Actions

Individuals who wish to be successful investors or traders must have a good grasp of market basics. 

 

Understanding the various forms of business activities is an important fundamental part of investing.

 

Corporate Actions

 

A corporate action is a decision made by the Board of Directors with the permission of the company's shareholders. 

 

Corporate actions comprise a pivotal point at which the firm and its stock values undergo significant changes. This might range from something as small as altering the company's name to something as important as declaring dividends.

 

Corporate acts may be divided into two categories from a financial standpoint: monetary and non-monetary. 

 

To put it another way, certain business acts have a monetary impact on the firm and its shareholders, while others do not. 

 

Changing the company's name, for example, is a non-monetary corporate move. Dividend declaration, on the other hand, is a monetary business move that will have an impact on stock prices. 

 

(Read also: Stock market analysis)

 

 

Different types of Corporate actions

 

1. Dividends

 

Dividends are paid to the company's shareholders. Dividends are given to disperse a company's earnings throughout the year. Dividends are distributed per share. 

 

As the example provided by Zerodha, Majesco, for example, announced an interim dividend of Rs 974 per share. 

 

The stock was trading at Rs 980+ a share when the dividend was issued, which was in the last few days of December 2020. After subtracting the dividend amount, the price of one share will fall. The price of a share plummeted from Rs 985.65 per share on December 21 to Rs 12.2 per share on December 22, 2020.

 

Dividends are not required to be paid every year. If the corporation believes that instead of paying dividends to shareholders, it would be preferable to use the same funds to fund a new initiative that would benefit the company in the long run, they are free to do so.

 

Furthermore, dividends do not have to be paid only from earnings. If a corporation makes a loss throughout the year but has a significant cash reserve, it can still pay dividends from those funds.

 

Dividend distribution may be the greatest option for the organisation at times. When the firm's development possibilities have been exhausted and it has spare cash, it makes sense for the corporation to reward its shareholders, therefore returning their faith in the organisation.

 

The decision to pay a dividend is made at the company's Annual General Meeting (AGM), which is attended by all of the company's directors. 

 

Dividends are not paid immediately upon the announcement. This is due to the fact that the shares are exchanged throughout the year, making it impossible to determine who receives the dividend and who does not. The timetable below can assist you in comprehending the dividend cycle.

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The Dividend Cycle, Source: www.zerodha.com

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• Dividend Declaration Date: The day on which the AGM takes place and the company's board of directors approves the dividend issuance is known as the dividend declaration date.

• Ex-Date/Ex-Dividend Date: Two working days before the record date, the ex-dividend date is usually set. The dividend is only paid to shareholders who possess the stock before the ex-dividend date. This is due to the fact that in India, typical settlement is done on a T+2 basis. 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.

• Record Date: 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.

• Dividend Payout Date: This is the date on which dividends are paid to shareholders registered in the company's registration.

• Cum Dividend: Until the ex-dividend date, the shares are considered to be cum dividend.

 

When a stock becomes ex-dividend, it normally decreases to the same extent as the dividends paid. If ITC (now trading at Rs. 335) declares a Rs.5 dividend, for example. The stock price will decline to the extent of the dividend paid on ex-date, and in this situation, ITC's price will drop to Rs.330. The sum paid out no longer belongs to the corporation, which is why the price has dropped.

 

Dividends can be paid at any point during the year. It's known as the interim dividend if it's paid within the fiscal year. The term "final dividend" refers to a payout paid at the end of the fiscal year.

 

 

2. Bonus Issue

 

Bonus shares are additional shares issued by the corporation to its owners. A 1:1 bonus issue, for example, indicates that for every share you own, you will receive an extra share in the firm. 

 

So, after the bonus issue, what happens to the stock price? As the value each share is modified proportionally, the total share value does not drop or rise.

 

If you own 50 Rs 10 shares, a 1:1 bonus issue will turn your holdings into 100 Rs 5 shares. Although the overall share value of Rs 500 remains unchanged, the value per share decreases, making it simpler for small investors to invest.

 

Astral Poly Technik is a firm that manufactures plastic pipes. It had announced a 1:3 bonus issue with a record date of March 19, 2021. According to this, for every three existing equity shares of Re 1 each, one equity share of Re 1 will be issued.

 

(Related reading: An Overview of Corporate Governance)

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Types of corporate actions

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   Stock Split

 

The term stock split may seem strange at first, yet it occurs often in the markets. It's self-evident what this means: the stocks you own have been divided!

 

The number of shares owned rises when the firm declares a stock split, but the investment value/market capitalization stays comparable to the bonus issue. 

 

The stock is divided into two halves based on 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 before the split, you would now have two shares following the split.

 

Eicher Motors is an example of a recent stock split in India. The firm, which until August 2020 was one of India's most expensive equities in terms of per-share valuation, announced a 1:10 stock split on August 24, 2020. 

 

After the stock split, the company's shares began trading at Rs 2,300 per share, down from Rs 21,700 per share before the stock split.

 

 

4. Rights Issue

 

A rights issue occurs when a firm issues new shares to its current shareholders rather than the general public. Unlike bonus shares, the Rights issue has a cost – generally a discount – attached to it. A 1:5 Rights issue, for example, allows you to subscribe for one extra share for every five shares you already own.

 

It's worth noting that a company may issue Rights issues to fund its expansion or to pay down debt.

 

A word of warning, however: the investor should not be misled by the company's discount, but rather look beyond it. A rights issue differs from a bonus issue in that it requires payment in order to get shares. 

 

As a result, a shareholder should only subscribe if he or she is confident in the company's future. It is plainly cheaper to acquire it on the open market if the market price is lower than the subscription price/right issue price.

 

(Recommended reading: Benefits of stock market)

 

 

5. Buyback of shares

 

It occurs when a firm buys its own stock from its owners, generally at a higher price than the market price.

 

Buybacks are used by companies to consolidate their holding in the company and gain more control, to prevent the share price from falling, to increase earnings per share (by reducing the number of outstanding shares in the market), or to increase investor confidence in the promoters.

 

Before you join in a stock buyback programme, find out why a firm is doing it. Short-term capital gains are taxed at 15%, while long-term capital gains are tax-free. 

 

Buybacks through a stock exchange have the same tax treatment as regular sales: short-term capital gains are taxed at 15%, while long-term capital gains are tax-free as explained by the Economic Times.

 

In the end, It is critical to comprehend the consequences of business actions in order to assess a company's worth. A rights issue may cause a drop in the share price, but a share repurchase may cause a rapid increase in the share price. 

 

As a result, analysts and stock specialists scrutinise these company acts attentively in order to forecast stock prices and future performance.

(Also read: Shares vs stocks)