Corporate actions are events a company initiates that can significantly impact its shareholders and other stakeholders. These actions often affect a company’s stock price, structure, or both, making them crucial for investors to understand.
There are three primary categories of corporate actions: mandatory, mandatory with choice, and voluntary.
- Mandatory corporate actions are actions that shareholders must follow, regardless of their preference. Examples include dividends, stock splits, and mergers. For instance, when a company declares a dividend, all eligible shareholders will receive it automatically.
- Mandatory with choice corporate actions require shareholders to make a decision, but they are still obligated to participate. A common example is a buyback offer, where shareholders can choose to sell their shares back to the company at a predetermined price.
- Voluntary corporate actions are optional, and shareholders can decide whether to participate. Rights issues, where a company offers additional shares to existing shareholders at a discounted price, fall into this category.
Understanding corporate actions is essential for investors to assess how these events may influence their investments and financial strategies. Investors can make more informed decisions and potentially maximize their returns by staying informed about corporate actions.
Dividends
A dividend is a payout from a company’s profits to its shareholders, usually distributed in cash or additional shares. Companies that are profitable and stable often declare dividends to reward investors. For instance, if a company declares a dividend of ₹5 per share, shareholders owning 100 shares will receive ₹500. Dividends indicate financial health, but companies may cut or skip dividends during tough times to preserve cash.
Bonus Issue
A bonus issue involves the free distribution of additional shares to existing shareholders in a specific ratio, such as 1:1 or 2:1. For example, in a 2:1 bonus issue, shareholders will receive two additional shares for every one they own. This increases the total number of shares in circulation, lowering the share price, but investors retain the same overall value. Bonus issues improve liquidity and make the shares more affordable.
Rights Issue
A rights issue allows existing shareholders to buy new shares at a discounted price, helping the company raise capital. For example, in a 1:4 rights issue, a shareholder holding 100 shares can buy 25 additional shares at a lower price. Rights issues are voluntary, and shareholders can choose to purchase the new shares or sell their rights.
Buyback
A buyback occurs when a company repurchases its own shares, reducing the total number of shares available in the market. This can increase the value of remaining shares by improving earnings per share (EPS). For example, if a company with 1,000,000 shares buys back 100,000 shares, the remaining shareholders’ proportionate ownership increases. Buybacks are often seen as a sign of confidence in the company’s future.
Stock Split
A stock split occurs when a company divides its existing shares into multiple smaller shares, making the stock more affordable without changing the total value of an investor’s holdings. For example, in a 2-for-1 stock split, a shareholder with 100 shares priced at ₹200 each will now hold 200 shares priced at ₹100 each. The overall value remains the same, but the shares become more accessible to smaller investors, increasing market liquidity.
Mergers and Acquisitions
Mergers and acquisitions (M&A) involve the combination of two or more companies into a single entity. A merger occurs when two companies join forces as equals, like the merger of Vodafone and Idea in India, creating a new company. An acquisition happens when one company takes over another, such as Facebook acquiring Instagram. M&As are usually aimed at achieving synergies, expanding market share, or entering new markets.
De-Merger
A de-merger is when a company splits into two or more separate entities, each functioning independently. For example, Reliance Industries demerged its telecom arm, creating Reliance Jio as a separate company. De-mergers help companies focus on specific business areas and unlock value for shareholders by separating distinct business segments.
Change in Company Name or Structure
A change in company name or structure occurs when a company alters its legal or operational framework, often as part of rebranding or restructuring efforts. For example, Facebook changed its name to Meta to reflect its shift toward the metaverse. Such changes can affect investor perception and the company’s strategic direction.
Spin-offs
A spin-off occurs when a company creates a new, independent entity by separating a division or business segment. The shareholders of the parent company typically receive shares in the newly formed company. For example, when eBay spun off its payment service, PayPal, into a separate company, eBay shareholders received shares in PayPal. Spin-offs allow companies to focus on core operations and help the new entity pursue its independent strategy.
Shareholder Meetings
Shareholder meetings are formal gatherings where shareholders discuss and vote on key company matters, such as electing board members, approving mergers, or deciding on dividend payouts. These meetings, such as the Annual General Meeting (AGM), allow shareholders to exercise their voting rights and influence major decisions. For instance, shareholders may vote on a company’s executive compensation or a proposed merger during an AGM.
Corporate Restructuring
Corporate restructuring involves reorganizing a company’s operations, finances, or ownership to improve efficiency, reduce costs, or respond to market challenges. This can include layoffs, asset sales, mergers, or changes in capital structure. For example, Tata Motors restructured its business by focusing on electric vehicles, selling off non-core assets, and reducing debt. Restructuring aims to enhance profitability or adapt to a changing business environment.