Corporate Actions

What Is Corporate Actions?

: - Corporate Actions is nothing but an multiple actions taken
by the corporates like whether to expand the business,
liquidation of business, issuance of dividend or the issuance
of bonus shares etc. and the same needs to be updated by
the concerned authorities such as custodian, fund admin on
their books of accounting platform on Ex - date to avoid
error.

Types of corporate actions

(i) Mandatory Corporate Actions

(ii) Voluntary Corporate Actions

Following are the mandatory corporate actions taken by the

corporate:-
(i) Cash Dividend: - A cash dividend is a payment
made by a company to its stakeholders in the form
of periodic distribution of cash which can be paid
on monthly or quarterly basis.
(ii) Stock Dividend: - A stock dividend is a payment to
shareholders that consists of additional shares
rather than cash. For e.g. - If a company issues a
 stock dividend of 5%, it will pay 0.05 shares for
every share owned by a shareholder. The owner of
100 shares would get five additional shares.
(iii) Bonus shares: - These are additional shares given
to shareholders without any additional cost. For
example, if a company declares a 1:1 bonus issue,
then every shareholder gets one share free for
every share owned. So, a shareholder having 10
shares of a company will get 10 bonus shares,
taking their total to 20 shares.
(iv) Stock Split: - Stock split is corporate actions taken
by a company to increase the number of shares
that are outstanding by issuing more shares to
current shareholders for the purpose to reduce the
current market price so that existing low cost
shareholders or new investors can buy the shares
on cheaper price. For Example, if company decide
to split the stock in 2:1, an additional share is given
for each share held by a shareholder. So, if
company had 1 lakhs shares outstanding before the
split, it will have 2 lakhs shares outstanding after a
2:1.
(v) Reverse stock split: - A reverse stock split is a type
of corporate action that reduces the number of
existing shares of stock into fewer, company do the
reverse split of stock if the business is not running
properly and the company is facing problems in the
repayment of debts, So while doing the reverse
stock split current market price increases and
 number of shares decreases on each shares
investor owns but market capitalization will remain
same.
(vi) MERGER / Acquisition: - In a merger, two
companies, usually of about equal size, agree to
join together to become a new company.
The stock of both companies is surrendered and
they instead trade shares of the new joint
company. For a merger to take place, the board of
directors of both companies must agree to the
action. In an acquisition, a larger company takes
over another smaller company. The stocks of the
acquired company cease to be traded, while shares
of the larger company continue to trade. An
acquisition may also be “hostile,” also known as a
hostile takeover, in which the smaller company is
acquired without the approval of the board of
directors. This may be done by buying a majority
share of the smaller company’s stocks, for instance.

What is the difference between stock dividend and bonus

shares and why they are different from each other?
Ans: - Stock Dividend: - (i) Stock dividend represents the
issuance of dividend in the form of shares rather than cash.
(ii) If a company has been following a policy of paying a
fixed amount of dividend share and continues it after
the declaration of the stock dividend, the total cash
dividends of the shareholders will increase in future.
 (iii) The declaration of a stock dividend allows the
company to declare a dividend without using up cash
(Conservation of cash) that may be needed to finance
the profitable investment opportunities within the
company.
(iv) To increase the trading activity, sometimes the
intention of a company in declaring the stock dividend
is to reduce the market price of the share and make it
more attractive to investors.

Bonus shares: - (i) Bonus shares can be sold in the market

immediately after a shareholder gets it.
(ii) Bonus shares are not taxable.
(iii) Shareholders will get dividend on more shares than
earlier in future.
(iv) Issuing bonus shares mean capitalisation of profits
and capitalisation of profits always increases the
credit worthiness of the company to borrow funds.
(v) Liquidity cash position of the company will remain
unaltered with the issue of bonus shares because
issue of bonus shares does not result into inflow or
outflow of cash.

(vii) DEMERGER: - A demerger is a restructuring

strategy in which one company separates part of its
business into a new entity by transferring business and
 assets. Ultimately, the two will operate as independent
companies. The term demerger can also cover a segment
of a larger company being sold or liquidated.

Why do companies demerge?

Companies demerge brands or business units for a number of
reasons, mainly to:
 Expand into new markets – operating in different
regions and markets can make a balance sheet
complicated. Dividing up a business can create clarity on
each entity’s core activities.
 Raise capital – splitting up a large business can give
investors a clearer idea of cash flow and operations,
making them more willing to pay a premium for the
separate businesses.
 Streamline business operations – it’s a good strategy to
separate out business segments that are
underperforming and causing the overall performance
to decline.
 Prevent an acquisition – dividing up a business can fend
off hostile takeover bids.
 Manage regulations – if a section of a business operates
in a highly regulated market, they might demerge this
part to ensure the rest of the company isn’t restricted.

How do demergers impact share prices?

  Typically, news of a demerger will have an immediate
positive impact on a company’s share price as it looks as
though management is taking positive steps toward
making operations clearer and more efficient.
 After the deal is complete, the share price of the parent
company is likely to fall as the equity is split up. This
volatility could continue for some time for both the new
and old stock. Research by Macquarie Group suggests
that the new entity could underperform for a period of
about six months while it finds its footing.
 For buy and hold investors, the volatility shouldn’t be
cause for concern, but it will be important to assess the
cash flows of both entities going forward before making
any decisions. And for traders, the volatility around
demergers can create exciting opportunities for going
long and short on the share prices of both companies.

How to demerge a company

There are a few different ways a company can demerge
certain assets or divisions, namely:
1. Spin offs
2. Carve outs
3. Split offs

Spin Offs: - A spin-off company is created when the parent

company distributes shares of the new subsidiary to existing
shareholders – usually in the form of a special dividend. After
the spin-off, there are two distinct entities with their own
management. The newly formed company will retain the
same assets, intellectual property and staff as it had under
the parent company. The parent company receives no cash in
the spin-off but retains an equity stake in the new company.
After the demerger, existing shareholders will own two
shares of separate companies in the place of just one.
Carve outs: - A carve out is the process of a parent company
selling shares in its subsidiary to the public through an initial
public offering. This creates a new set of shareholders and
equity for the company. Carve outs often don’t happen in
isolation. They can mark the first step toward a company
performing a full spin off or split off from the parent.
However, in order for the spin off to take place later, a
company can’t sell too many shares at its IPO. As we’ve seen
earlier, in order for a spin off to be tax efficient, they have to
sell 80% of its shares. If the firm has already sold more than
20% carve out, but want to retain some equity, it’s unlikely
they’ll be able to do both.

Why carve out a company?

Companies choose to carve out a subsidiary if they want to
receive a cash inflow from a new pool of investors, rather
than their existing shareholder base. The parent company
still retains an equity stake in the business, but often gives up
a lot more control than in a spin off. For example, while a
spin-off company usually has directors from the parent
company sitting on its board, a carved-out firm might have no
involvement from the previous management. Carve outs are
a more common solution for when the area of the business
being demerged is a ‘problem’ area. It means the parent
company can capitalise on the business by selling shares but
doesn’t have as much involvement in operations or
obligations going forward.
 

What is a split off?

A split-off company is similar to a spin-off company, in that
the parent company will offer shares to existing
shareholders, but there’s a catch: they have to choose. A
shareholder can either continue holding shares in the parent
company, or exchange some (or all) of their holding for
shares in the new company.
 
Why split off a company?
A company would split off a unit for the same reasons it
would perform a spin off: to boost shareholder value. The
only difference is the method of distributing the new shares.
A split off can be thought of as more like a stock buyback.
The parent company wants to get back its equity from
shareholders by offering them shares in a new company in
exchange. They usually give a premium to shareholders to
encourage them into the offer, meaning the new shares will
be worth more than their old ones. A split off is often a
follow-on step after a carve out, as the listing of the new
company on a stock exchange provides a clear indication of
how the new stock’s price measures up to the parent
company’s – giving investors an idea of which company’s
shares they want to own.

Name Change: -

CUSIP or ISIN Change: - ISIN stands for International

Securities Identification Numbering System which contains
alpha numeric code that contains 12 characters and is the
global ISO standard for unique identification of financial
instruments, including equity, debt, derivatives and indices.
The Committee on Uniform Security Identification Purposes
(CUSIP), on the other hand, is a North American
alphanumeric code that has nine characters used for
securities trade clearing and settlement. It is used primarily in
the United States of America. It contains the base which is
the first six characters that identifies the issuer and assigned
in alphabetical sequence, the seventh and eighth characters
that identifies the issue, and the ninth character which is the
check digit. The check digit is calculated by converting letters
to numbers according to their position in the alphabet. All
second digits are then multiplied by two to come up with the
CUSIP check digit.
Liquidation / Bankruptcy: - Liquidation/Bankruptcy generally
refers to the process of selling off a company's inventory,
typically at a big discount, to generate cash. In most cases, a
liquidation sale is a precursor to a business closing. Once all
the assets have been sold, the business is shut down.
Delisting: - Delisting curbs the securities of the delisted
company from being traded on the stock exchange. It can be
done either on voluntary decision of the company or forcibly
done by SEBI on account of some wrong doing by the
company. There are certain norms which a company needs to
follow while listing on the stock exchange.
In case the company fails to do so, then SEBI takes the action
which generally leads to delisting of the company from the
stock exchange.
Redemption: -
Call Offer: -
Interest Payment: -