9. Corporate Actions

Philosophy of Corporate Actions

A company initiates several actions, apart from those related to its business, that has a direct implication for its stakeholders. These include sharing of surplus with the shareholders in the form of dividends, changes in the capital structure through the further issue of shares, buybacks, mergers, and acquisitions, delisting, raising debt, and others. In a company that has made a public issue of shares, the interest of the minority investors has to be protected.
Corporate actions are regulated by provisions of the following:

  1. Provisions of the Companies Act, 2013,
  2. Relevant regulations of SEBI, and
  3. Terms of the listing agreement entered into with the stock exchange

Dividend

The proportion of distribution and retention of profits will depend upon the opportunities available for plowing back the profits into the business, the nature of management, the expectation of shareholders, and ultimately the availability of cash in the business to distribute to the shareholders. A company may declare ‘interim dividends’ during the financial year and a ‘final dividend at the end of the year. A company has to pay dividends within 30 days of its declaration.

For example: if a 50% dividend is declared by two companies ‘A’ and ‘B’ with different face values of Rs.2 and Rs.10 respectively, an investor in company ‘A’ will receive Re. 1 as a dividend as against Rs. 5 in the case of company ‘B’. Dividends received by the investors in two companies are different even though the percentage is the same because the face value of the shares is different. In the interest of the investors, company ‘A’ is now required to declare the dividend as Re. 1 per share while company ‘B’ will declare the dividend payable as Rs. 5 per share.

 

Right Issue

Rights Issue A rights issue is a corporate action in which a company makes an offering of new shares to existing shareholders at a discounted price. This is a way for the company to raise capital without having to issue debt or dilute the existing shareholdings.

When a company issues a rights issue, existing shareholders are given the right to purchase additional shares at a discounted rate. The company will typically set a record date, after which shareholders will be eligible to participate in the offering. Shareholders must exercise their right to purchase additional shares before the expiration date.

Rights issues can be used to raise capital for a variety of purposes, including financing expansions, repaying debts, and making acquisitions. Rights issues are also used to raise the companys stock price by increasing the number of shares outstanding. Rights issues have the potential to dilute the value of existing shares, however, as the additional shares issued can decrease the value of each existing share.

For example: if the company issues 1-for-2 rights issue at Rs.70 per share, shareholder ‘A’ will have right to buy one share for every two shares held by him at Rs. 70. As ‘A’ has 10 shares, he can buy 5 more shares at Rs. 70. In practice, companies allow shareholders to apply for additional shares beyond their entitlement because some shareholders may neither apply for shares under their entitlement nor transfer their rights to others and those shares may be available for issuance to these shareholders who desire additional shares.

Bonus Issue

Bonus Issue A bonus issue is a corporate action in which a company issues additional shares to existing shareholders at no cost. Bonus issues are a way for companies to reward their shareholders and to increase the liquidity of their stock. Bonus issues can also be used to raise the companys stock price, as it increases the number of shares outstanding.

When a company issues a bonus issue, existing shareholders are given additional shares based on the number of shares they already own. The company typically sets a record date, after which shareholders are eligible to participate in the offering. Bonus issues can also be used to increase the voting power of existing shareholders.

Bonus issues can be used to reward existing shareholders by providing them with additional shares without cost. However, bonus issues can also be used to dilute the value of existing shares, as the additional shares issued can decrease the value of each existing share.

For example: If shares of a company were trading at a price of Rs. 1000 per share prior to the bonus, post bonus on 1:1 basis, fair price of share is likely to come down to Rs. 500 per share to maintain post bonus market value of a holding equivalent to its pre bonus market value. Therefore, mathematically, the value of the investor’s holding pre bonus at Rs. 1, 00,000 (100 shares x Rs. 1000) remains the same Rs. 1, 00,000 (200 shares x Rs. 500) post bonus. Actual market price of share post bonus will be around Rs. 500 (not exactly at of Rs. 500) as it will depend on market factors of demand and supply.

Stock Split

Stock Split A stock split is a corporate action in which a company divides its existing shares into multiple shares at a lower price. This is typically done to make the companys shares more affordable and to increase the liquidity of the stock. Stock splits are also used to increase a companys stock price, as it increases the number of shares outstanding.

When a company issues a stock split, existing shareholders are given additional shares based on the number of shares they currently own. The company typically sets a record date, after which shareholders are eligible to participate in the offering.

Stock splits can also reduce the voting power of existing shareholders, as each share is worth less than before. Stock splits can be used to make a companys shares more affordable and to increase its stock price. However, stock splits can also be used to dilute the value of existing shares, as the additional shares issued can decrease the value of each existing share.

For example, SBI initiated a stock split of its equity shares from a face value of Rs.10 to Re.1. A shareholder holding 1 share of a face value of Rs.10 will now hold 10 shares each with a face value of Re.1. The stock that was trading in the markets at over Rs.2700 at the time of the announcement traded post-split at around Rs.295. The value of the shareholder’s holding was around Rs.2700 (1 share x Rs.2700) prior to the stock split. Post the split, the value of the holding is Rs. 2950 (10 shares x Rs.295). The market price after the split will depend upon the market forces of demand and supply.

Share Consolidation

Share consolidation is the reverse of stock split. In a share consolidation, the company changes the structure of its share capital by increasing the par value of its shares in a defined ratio and correspondingly reducing the number of shares outstanding to maintain the paid up/subscribed capital. A stock consolidation of 5:1 means consolidation of 5 existing share into 1 share. Accordingly, face value of shares will go up 5 times of the original face value and no. of outstanding shares will become one fifth the original number.

Merger and Acquisition

A merger and acquisition (M&A) is a corporate action in which two companies join together, either through an acquisition where one company buys another or a merger where two companies combine. This is typically done to expand the companys operations and to increase its market share.

When a company issues an M&A, existing shareholders are typically given shares of the combined company based on the number of shares they currently own. The company typically sets a record date, after which shareholders are eligible to participate in the offering. Mergers and acquisitions can also affect the voting power of existing shareholders, as the combined company may have different rules regarding ownership and voting rights.

Mergers and acquisitions can be used to expand a companys operations and to increase its market share. However, mergers and acquisitions can also be used to dilute the value of existing shares, as the additional shares issued can decrease the value of each existing share.

Demerger/Spin-off

Demerger / Spinoff A demerger or spinoff is a corporate action in which a company distributes a portion of its assets to create a new company. This is typically done to focus the companys operations or to unlock value from its assets.

When a company issues a demerger or spinoff, existing shareholders are typically given shares of the new company based on the number of shares they currently own. The company typically sets a record date, after which shareholders are eligible to participate in the offering. Demergers and spinoffs can also affect the voting power of existing shareholders, as the new company may have different rules regarding ownership and voting rights.

For example, in April 2018, Adani Enterprise spun-off its renewable energy business to a new company Adani Green Energy Limited. Shareholders of Adani Enterprises were given shares in the new company is the ratio of 761:1000. Earlier, in June 2015, Adani Enterprise spun-off its ports, and power and transmission businesses into two separate companies: Adani Ports and Adani Transmission, respectively

Scheme of arrangement

A scheme of arrangement is a corporate action in which a company restructures its operations and debts.

This is typically done to make the company more efficient or to reduce its debts. When a company issues a scheme of arrangement, existing shareholders are typically given shares of the restructured company based on the number of shares they currently own. The company typically sets a record date, after which shareholders are eligible to participate in the offering. Schemes of arrangement can also affect the voting power of existing shareholders, as the restructured company may have different rules regarding ownership and voting rights.

Schemes of arrangement can be used to make a company more efficient and to reduce its debts. However, schemes of arrangement can also be used to dilute the value of existing shares, as the additional shares issued can decrease the value of each existing share.

Loan Restructuring

Loan Restructuring Loan restructuring is a corporate action in which a company renegotiates the terms of its debt. This is typically done to make the companys debt more manageable or to reduce its interest payments.

When a company restructures its debt, existing shareholders are typically given shares of the restructured company based on the number of shares they currently own. The company typically sets a record date, after which shareholders are eligible to participate in the offering. Loan restructurings can also affect the voting power of existing shareholders, as the restructured company may have different rules regarding ownership and voting rights.

Buyback of Shares

Buyback of shares refers to a company repurchasing its own shares from its shareholders. Companies may choose to do this to increase the value of their remaining shares, reduce the number of shares outstanding, or return capital to shareholders. The buyback of shares is also known as astock repurchase.”

Delisting and relisting of Shares

Delisting and relisting of shares refers to the process of a company removing its shares from a public stock exchange and then listing them again at a later date. Delisting is often done when a company‘s shares are underperforming, as it can help to reduce public scrutiny and free up capital. Relisting is done when a company believes that its shares are undervalued and that they may perform better if they are listed on the exchange again.

Share Swap

Share swap is a process wherein two companies agree to exchange their shares with each other. This could be done for various reasons such as to gain access to each others markets, to facilitate a merger or acquisition, or to increase the ownership stake of one company in the other. Share swaps can also be used to restructure the ownership of a company by swapping out minority shareholders for a majority stakeholder.

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Chart Source– Tradingview.com

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