📘 Chapter 9: Corporate Actions – Outline
| Section | Title | Description |
|---|---|---|
| 9.1 | Philosophy of Corporate Actions | Explains the intent and strategic significance of corporate actions for companies. |
| 9.2 | Dividend | Understanding final/interim dividends, record dates, and their impact on investors and price. |
| 9.3 | Rights Issue | Details of issuing shares to existing shareholders at a discount, and impact on dilution. |
| 9.4 | Bonus Issue | Issuing additional shares free of cost to existing shareholders and its effect on EPS. |
| 9.5 | Stock Split | Breaking down high-priced shares into smaller units to improve affordability and liquidity. |
| 9.6 | Share Consolidation | Also known as reverse split, consolidating shares to increase share price and reduce count. |
| 9.7 | Mergers and Acquisitions | Combining companies for synergy, growth, and strategic advantage, and its impact on shareholders. |
| 9.8 | Demerger / Spin-off | Separation of a business segment into a new entity for strategic or operational reasons. |
| 9.9 | Scheme of Arrangement | Legal reorganization methods under regulatory supervision involving mergers, demergers, etc. |
| 9.10 | Loan Restructuring | Modifying repayment terms or converting loans for stressed companies; implications on equity. |
| 9.11 | Buyback of Shares | Company repurchasing its own shares from the market or shareholders to boost valuation. |
| 9.12 | Delisting and Relisting | Removal of shares from stock exchange and process of relisting post restructuring or revival. |
| 9.13 | Share Swap | Exchanging shares during mergers or acquisitions, affecting ownership and valuation. |
🧩 9.1 Philosophy of Corporate Actions
Corporate actions are initiatives taken by a company that result in a change in its capital structure, ownership pattern, or overall valuation. These actions reflect the company’s strategic decision-making and financial health and can directly impact shareholder value. The goal is often to return value to shareholders, optimize capital structure, or reposition the business.
📘 What are Corporate Actions?
Corporate actions are events initiated by companies that impact shareholders and sometimes debt-holders. These actions are approved by the company’s board of directors and may require shareholder approval depending on the nature of the action.
Common examples include dividends, bonus shares, stock splits, rights issues, mergers, demergers, buybacks, and more. Such actions affect stock price behavior, liquidity, earnings per share (EPS), and investor sentiment.
| Type | Description | Impact on Shareholder |
|---|---|---|
| Mandatory | Automatically applies to all shareholders, e.g., bonus shares, stock splits | No action required by shareholder |
| Voluntary | Shareholder chooses whether or not to participate, e.g., rights issue, buyback | Action based on investor decision |
| Conditional | Triggered based on certain terms being met, e.g., merger based on vote | Outcome depends on stakeholder consensus |
✅ Example: If a company declares a 1:1 bonus issue, it means a shareholder will receive 1 additional share for every 1 share held—without paying anything extra.
⚠️ Note: Investors must understand each corporate action’s implications. Not all actions lead to immediate gains; some might dilute value or signal financial stress.
Understanding corporate actions is critical for both retail and institutional investors, as it helps them interpret price changes, dividend signals, and corporate governance cues.
💸 9.2 Dividend
A dividend is the portion of a company’s profit distributed to its shareholders as a reward for investing in the company. It represents a **return on investment** and reflects the company’s financial health, profitability, and cash position.
📘 What is a Dividend?
It is a payment made by a corporation to its shareholders, usually in the form of cash or additional shares, declared by the board of directors and approved by shareholders in certain cases.
Dividends can be issued in different forms and at different times based on the company’s earnings, retained profits, and future growth plans. The decision also depends on whether the company wants to reward shareholders or reinvest profits back into the business.
| Type of Dividend | Description |
|---|---|
| Final Dividend | Declared after the financial year ends and approved at the AGM; based on audited profits. |
| Interim Dividend | Declared during the financial year before final accounts are prepared; approved by the board only. |
| Cash Dividend | Payout made in actual money transferred to the shareholder’s bank account. |
| Stock Dividend | Company issues additional shares to shareholders instead of paying cash; also called bonus shares in some cases. |
🗓️ Important Dates Related to Dividend
- Declaration Date: Date on which the dividend is officially announced.
- Record Date: Cut-off date to determine eligible shareholders.
- Ex-Dividend Date: Date before which investors must own the stock to be eligible for dividend.
- Payment Date: Date when the dividend is actually credited.
✅ Example: If a company declares ₹5 per share as a final dividend and you hold 100 shares as of the record date, you will receive ₹500 in your account on the payment date.
⚠️ Note: Dividend-paying stocks may see a drop in price by the amount of dividend on the ex-dividend date. This is a normal adjustment and not a loss to shareholders.
Dividends are a key signal of management’s confidence in the company’s earnings and long-term value creation. However, growing companies may choose to retain earnings instead of distributing them as dividends.
📜 9.3 Rights Issue
A Rights Issue is a way for a company to raise additional capital by offering new shares to its existing shareholders in proportion to their current holdings. This helps companies fund expansion, reduce debt, or meet working capital needs—without approaching the public or third-party investors.
📘 What is a Rights Issue?
It is an invitation to existing shareholders to purchase additional shares at a discounted price within a specific time window. It is a **voluntary corporate action**, meaning shareholders can choose to subscribe or not.
The rights are usually offered at a price lower than the market value, making it attractive. Shareholders are given an **entitlement ratio**, such as 1:4 (one additional share for every four held), and can:
- ✅ Subscribe to the rights shares
- 🔁 Renounce the rights partially or fully (sell them in the rights market)
- 🚫 Let the rights lapse by taking no action
| Term | Description |
|---|---|
| Rights Entitlement | Number of additional shares eligible based on current holdings |
| Renunciation | Option to sell or transfer rights to another buyer in the market |
| Record Date | Date used to determine eligible shareholders for the rights offer |
| Rights Issue Price | Discounted price at which new shares are offered |
✅ Example: If you hold 400 shares and the company announces a rights issue of 1:4 at ₹100 per share, you are eligible to apply for 100 additional shares by paying ₹10,000.
⚠️ Note: If rights shares are not subscribed or renounced, they will lapse and the shareholder misses the opportunity to invest at a lower price.
Rights issues help companies raise capital without diluting promoter holding significantly, since shares are offered to existing owners. However, if not subscribed, it can lead to dilution in ownership and voting power.
🎁 9.4 Bonus Issue
A Bonus Issue refers to the free distribution of additional shares to existing shareholders in a specific ratio. It is issued from the company’s accumulated reserves or retained earnings and does not require any cash payment from shareholders.
📘 What is a Bonus Issue?
In a bonus issue, the company converts a portion of its reserves into equity capital and issues new shares to existing shareholders without charging them. The move increases the number of shares but does not increase the shareholder’s investment value proportionally.
The purpose of a bonus issue is often to reward long-term shareholders, improve liquidity, or align the share price to a more tradeable range. It also signals financial strength and stability of the company.
| Aspect | Description |
|---|---|
| Source | Free reserves or securities premium account |
| Shareholder Cost | Zero (shares issued free of charge) |
| Effect on Market Price | Stock price adjusts downward post bonus to maintain market capitalization |
| Effect on EPS | EPS reduces proportionately due to increase in total outstanding shares |
✅ Example: If a company announces a 1:1 bonus issue and you hold 200 shares, you will receive 200 additional shares for free. If the stock was trading at ₹400, the price may adjust to ₹200 after the issue.
⚠️ Note: Although the number of shares increases, the total investment value remains unchanged due to price adjustment. Bonus issues do not involve cash flows.
Bonus issues do not dilute shareholder ownership percentage as they are allotted proportionately. However, they dilute the per-share metrics like EPS and Book Value per Share, which analysts factor in during valuations.
✂️ 9.5 Stock Split
A Stock Split is a corporate action where a company divides its existing shares into multiple shares to improve affordability and liquidity. It reduces the face value of each share, increases the number of outstanding shares, but does not change the company’s overall market capitalization.
📘 What is a Stock Split?
In a stock split, a company increases the number of shares held by each shareholder by a fixed ratio while proportionally reducing the face value. For example, in a 2-for-1 split, each share of ₹10 becomes two shares of ₹5 each.
Stock splits are generally undertaken to make shares more affordable for small investors and to increase liquidity in the market. This psychological effect can also attract new investors without changing the underlying fundamentals.
| Aspect | Before Split | After Split (2-for-1) |
|---|---|---|
| Number of Shares | 100 | 200 |
| Face Value per Share | ₹10 | ₹5 |
| Market Price per Share | ₹1,000 | ₹500 |
| Total Investment Value | ₹1,00,000 | ₹1,00,000 |
✅ Example: If you own 50 shares of a company priced at ₹2,000 each and the company announces a 1:2 stock split, you will receive 100 shares priced at ₹1,000 each. Your total investment remains the same.
⚠️ Note: Stock splits do not increase the intrinsic value of a company. They only make the stock more accessible and improve liquidity. Metrics like EPS and Book Value per Share reduce accordingly.
From a valuation perspective, stock splits have no impact on a company’s earnings or fundamentals. However, improved affordability and retail participation can lead to higher volumes and potential re-rating in some cases.
🧮 9.6 Share Consolidation (Reverse Split)
A Share Consolidation, also known as a Reverse Stock Split, is a corporate action where a company reduces the number of outstanding shares by combining multiple shares into a single share. The face value increases proportionally, but the total investment value remains unchanged.
📘 What is Share Consolidation?
It is the opposite of a stock split. For example, in a 1-for-5 reverse split, every 5 shares with ₹2 face value will be consolidated into 1 share of ₹10 face value. This reduces the number of shares while increasing the share price proportionately.
Companies typically undertake reverse splits to increase the stock price when it becomes too low or appears as a “penny stock.” A higher price improves the stock’s credibility and makes it eligible for institutional investment or exchange listing requirements.
| Aspect | Before Consolidation | After Consolidation (1-for-5) |
|---|---|---|
| Number of Shares | 500 | 100 |
| Face Value per Share | ₹2 | ₹10 |
| Market Price per Share | ₹40 | ₹200 |
| Total Investment Value | ₹20,000 | ₹20,000 |
✅ Example: If you hold 1,000 shares priced at ₹10 each and the company announces a 1:10 consolidation, you’ll end up with 100 shares priced at ₹100 each. The total value of your investment remains ₹10,000.
⚠️ Note: Share consolidation does not change the overall value of your holdings. However, it may reduce market liquidity, and some investors may misinterpret the price increase as actual appreciation.
While reverse splits can improve perception and meet exchange listing norms, they must be handled with clarity in communication. Often, companies in financial distress may resort to reverse splits, so investors should evaluate the intent behind such actions.
🤝 9.7 Mergers and Acquisitions
Mergers and Acquisitions (M&A) are strategic corporate actions that involve the consolidation of companies or assets. These actions are taken to achieve growth, increase market share, gain competitive advantage, or achieve cost efficiencies through synergies.
📘 What is a Merger?
A merger refers to the combination of two or more companies into a single legal entity. Typically, shareholders of both merging companies receive shares in the new or surviving company.
📘 What is an Acquisition?
An acquisition occurs when one company takes over another. The acquired company may either continue to exist as a subsidiary or get absorbed completely into the acquiring company.
M&A transactions can be friendly or hostile and can significantly impact shareholder value. The synergy expected from the deal is often the core driver of such transactions.
| Type | Description | Example |
|---|---|---|
| Horizontal Merger | Merger between companies in the same industry/line of business | Zee Entertainment and Sony India |
| Vertical Merger | Merger between companies in different stages of the supply chain | Reliance acquiring logistics or warehousing firms |
| Conglomerate Merger | Merger between unrelated businesses | Tata Group acquiring Air India |
✅ Example: HDFC Ltd. and HDFC Bank merger combined one of India’s largest housing finance companies with a leading private bank, enhancing customer reach and lowering the cost of funds.
⚠️ Note: Not all M&A transactions create value. Poor integration, cultural mismatches, or overpayment can result in shareholder loss instead of gain.
M&A deals are governed by legal and regulatory frameworks such as the Companies Act, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, and Competition Commission of India (CCI) norms. Analysts must evaluate the financial, operational, and cultural aspects before concluding on the success of any such transaction.
🔀 9.8 Demerger / Spin-off
A Demerger or Spin-off is a corporate restructuring process in which a company separates one or more of its business segments into a new independent entity. This allows each entity to focus better on its core competencies, unlock value, and operate with strategic independence.
📘 What is a Demerger?
A demerger involves the transfer of one or more business undertakings to a newly created or existing company, while shareholders of the parent company continue to hold proportionate shares in the new entity.
📘 What is a Spin-off?
A spin-off is a specific type of demerger where a business unit becomes an independent entity, and shares of the new entity are allotted to the existing shareholders of the parent company on a pro-rata basis.
Demergers are undertaken to improve transparency, enhance operational focus, and unlock hidden value in diverse conglomerates. It allows markets to value each business separately based on its own growth potential and risk profile.
| Aspect | Demerger | Spin-off |
|---|---|---|
| Structure | Business unit transferred to another company | Unit becomes a new independent company |
| Shareholder Impact | Get shares in the demerged company | Receive shares in the new spun-off entity |
| Parent Company | Continues to operate independently | Often continues with reduced operations |
| Control | Management may or may not retain control | Usually operates independently |
✅ Example: JSW Energy demerged its renewable energy business into a separate listed company, JSW Energy Neo, to attract focused green energy investors and unlock sector-specific value.
⚠️ Note: While demergers can create value, they also involve costs, regulatory clearances, and may impact brand perception or synergies of the parent group.
For analysts, demergers are important restructuring events. They often result in **price discovery** for the new entity and **strategic realignment** for the parent. Key elements to evaluate include post-demerger financials, management quality, and standalone growth potential.
📑 9.9 Scheme of Arrangement
A Scheme of Arrangement is a court-approved restructuring process under the Companies Act that allows companies to reorganize their capital, business, or ownership. It provides a legal mechanism for mergers, demergers, capital reduction, or other restructuring involving creditors and shareholders.
📘 What is a Scheme of Arrangement?
It is a formal proposal submitted to the National Company Law Tribunal (NCLT) that outlines how a company plans to restructure its business or capital. The scheme must be approved by shareholders, creditors, and regulatory bodies before implementation.
A scheme can be used for a wide range of purposes – from combining businesses, spinning off units, reorganizing debt, or modifying shareholding patterns. It allows flexibility in structure and execution, provided approvals are obtained.
| Purpose | Examples |
|---|---|
| Merger / Amalgamation | Combining two or more companies into one entity |
| Demerger | Splitting a company into multiple independent businesses |
| Capital Reduction | Reducing share capital to write off losses or return surplus |
| Compromise with Creditors | Restructuring repayment obligations or extending terms |
| Reorganization | Changing shareholding or internal management structure |
✅ Example: The merger of Mindtree and L&T Infotech was executed under a court-approved scheme of arrangement, which allowed a smooth integration of operations and shareholder approvals.
⚠️ Note: A scheme must comply with Section 230–232 of the Companies Act, 2013, and is subject to scrutiny by the NCLT, SEBI, and stock exchanges. Transparency and fairness to all stakeholders are critical.
Analysts should review the draft scheme carefully to evaluate its impact on shareholders, EPS, voting rights, and post-restructuring capital structure. Not all schemes are value-accretive, especially if used to mask operational challenges.
💼 9.10 Loan Restructuring
Loan Restructuring is a formal process by which a lender and borrower mutually agree to alter the terms of a loan to enable the borrower to repay the debt more comfortably. This is often used for companies facing financial stress or temporary liquidity issues.
📘 What is Loan Restructuring?
It involves revising key terms of the loan such as interest rate, repayment tenure, installment schedule, or even partial waiver of dues to avoid default and help restore the borrower’s viability.
The main goal is to avoid classifying the borrower as a defaulter or initiating insolvency proceedings, thereby preserving enterprise value and ensuring partial or full recovery for the lender.
| Type of Restructuring | Description |
|---|---|
| Rescheduling | Extending the loan repayment timeline by increasing the loan tenure |
| Interest Reduction | Lowering the interest rate to reduce the monthly burden |
| Principal Moratorium | Temporary suspension of principal payments to allow breathing space |
| Conversion to Equity | Part or full outstanding loan converted into shares of the company |
| Haircut | Partial write-off of the loan amount by the lender (loss booked) |
✅ Example: During the COVID-19 pandemic, RBI allowed banks to restructure corporate loans by extending repayment timelines and offering moratoriums to prevent large-scale defaults.
⚠️ Note: Frequent restructuring may affect a company’s credit rating, market perception, and investor confidence. Analysts must assess the reasons behind restructuring carefully.
Loan restructuring is governed by RBI guidelines and must follow fair valuation and disclosure practices. From an investor or analyst’s point of view, restructuring may offer short-term relief but could signal deeper financial trouble if not managed properly.
🔄 9.11 Buyback of Shares
A Buyback of Shares is a corporate action in which a company repurchases its own shares from the existing shareholders. This reduces the number of outstanding shares in the market and can lead to an increase in key per-share financial metrics like Earnings Per Share (EPS).
📘 What is a Buyback?
A buyback is a method used by companies to return surplus cash to shareholders, reduce capital, improve valuation ratios, and signal confidence in their future earnings. It must comply with SEBI (Buy-back of Securities) Regulations.
A company can buy back shares through two primary routes – from the open market or via a tender offer to existing shareholders at a fixed price. Each method has its own implications for price discovery and shareholder participation.
| Method | Description | Key Feature |
|---|---|---|
| Open Market Buyback | Company purchases shares directly from the stock exchange | Flexible; may not involve all shareholders equally |
| Tender Offer | Company offers to buy shares at a fixed price from all shareholders | Pro-rata participation for all eligible shareholders |
✅ Example: Infosys and TCS have conducted several share buybacks through tender offers to return excess cash to shareholders and improve per-share metrics like EPS and Book Value per Share.
⚠️ Note: While buybacks can signal financial strength, they must be monitored for motives. Some companies use buybacks to artificially boost EPS without improving underlying earnings.
Buybacks are often favored over dividends due to tax efficiency and flexibility. They can also help consolidate promoter shareholding and defend against hostile takeovers. However, they require proper regulatory disclosures and should not hurt long-term growth capital.
🔽 9.12 Delisting and Relisting of Shares
Delisting is the process through which a listed company removes its shares from being traded on a stock exchange. It can be done voluntarily by the company or compulsorily by the regulator due to non-compliance.
📘 What is Delisting?
Delisting refers to the permanent removal of a company’s equity shares from the stock exchange. Once delisted, the shares no longer trade publicly and the company may either go private or continue operations as an unlisted entity.
Delisting is regulated under the SEBI (Delisting of Equity Shares) Regulations and must follow a transparent process ensuring fair treatment to public shareholders.
| Type | Description | Examples |
|---|---|---|
| Voluntary Delisting | Company chooses to delist by buying out public shareholders | Dell (international), Hexaware Technologies (India) |
| Compulsory Delisting | Ordered by SEBI due to violations, non-compliance, or lack of trading activity | Multiple shell companies delisted by SEBI |
📘 What is Relisting?
Relisting occurs when a previously delisted company meets eligibility norms again and chooses to list its shares on a stock exchange. It is treated like a fresh IPO and must follow SEBI’s listing regulations.
✅ Example: Vedanta attempted a voluntary delisting in 2020 by offering to buy back shares from public investors. However, it failed due to insufficient public participation.
⚠️ Note: Once delisted, retail investors may find it difficult to sell their shares as liquidity is lost. Fair exit pricing becomes critical, and SEBI mandates a reverse book building process for price discovery in voluntary delisting.
Analysts must carefully evaluate the intent and fairness of delisting offers. A successful delisting may offer a profitable exit to shareholders, while forced delisting can result in financial loss due to lack of trading opportunities.
🔁 9.13 Share Swap
A Share Swap is a method used during mergers and acquisitions where one company offers its own shares in exchange for the shares of another company. It is a non-cash deal that enables the acquiring company to take over another without immediate cash outflow.
📘 What is a Share Swap?
In a share swap arrangement, shareholders of the target company receive a certain number of shares in the acquiring company based on a pre-agreed swap ratio. This ratio is determined based on valuation metrics like EPS, Book Value, and market price.
Share swaps are commonly used in friendly takeovers where both management teams agree on terms. The process allows ownership transfer without the acquirer using cash, and the existing shareholders of the target company become shareholders in the acquiring company.
| Aspect | Description |
|---|---|
| Swap Ratio | Number of shares given for each share held in the target company |
| Purpose | Facilitates acquisition without using cash |
| Valuation Basis | Market price, earnings, book value, and future projections |
| Impact on Ownership | Target company shareholders become shareholders in the acquiring company |
✅ Example: In the merger of Bank of Baroda with Vijaya Bank and Dena Bank, the government implemented a share swap formula where shareholders of Vijaya and Dena received shares in Bank of Baroda based on a predetermined ratio.
⚠️ Note: Share swap deals can lead to ownership dilution for existing shareholders of the acquiring company. Analysts must examine the fairness of the swap ratio and long-term value creation potential.
For analysts, understanding the swap ratio, dilution impact, and financial synergy is crucial while evaluating such deals. Share swap arrangements must also be approved by shareholders and comply with SEBI and company law provisions.
