CORPORATE ACTION by PURNIMA NAIDU @ LexCliq

CORPORATE ACTION

Introduction:-

Corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by that company. Certain corporate actions such as dividends (for equity securities) or coupon payments [for debt securities (bonds)] may have a direct financial impact on shareholders or bondholders; Another example is the redemption of debt securities (early withdrawal). Other corporate actions such as share splitting may have an indirect effect, as increased liquidity of the share may increase the value of the share. Certain corporate actions such as name changes have no direct economic impact on shareholders.

The main reasons for companies to use corporate actions are:

Returning profit to shareholders: A cash dividend is a perfect example where a public company declares a dividend to be paid on each outstanding share. Bonus is another situation where the shareholder is rewarded. In the strict sense, the bonus issue should not affect the share price but in fact, in rare cases, it does so and results in an overall increase in value.

Influencing the share price: If the price of a share is too high or too low, the liquidity of the share is affected. Not all investors will be able to afford very high priced stocks and very low priced stocks may become unlisted. Corporate actions such as stock splitting or reverse stock splitting increase or decrease the number of outstanding shares, respectively, to decrease or increase the stock price. A buyback is another example of influencing the stock price whereby a company buys back shares from the market in an attempt to reduce the number of outstanding shares, leading to an increase in prices.

Reorganization of company: Reorganization of corporations so as to increase their profitability. An example of corporate action is a merger whereby two companies that are competitive or complementary become one to increase profits. Spinoff is an example of corporate action whereby a company splits to focus on its core competencies.

Types of Corporate actions:-

Corporate Actions are classified as voluntary, compulsory and compulsory at will:-

  1. Compulsory Corporate Action: A mandatory corporate action is an event initiated by a company board of directors that affects all shareholders. Shareholder participation is mandatory for these corporate actions. An example of mandatory corporate action is a cash dividend. All holders are entitled to receive dividend payments and a shareholder is not required to do anything to receive dividends. Other examples of mandatory corporate actions include share split, merger, pre-withdrawal, return of capital, bonus issue, asset ID change, shift-pass and spinoff. Strictly speaking, the mandatory word is not appropriate because the shareholder rate does not actually do anything. In all the cases cited above, the shareholder is simply a passive beneficiary of these actions. There is nothing for the share holder to do or what he has to do in a mandatory corporate action.
  2. Voluntary Corporate Action: A voluntary corporate action is an action where shareholders elect to participate in the action. A response is required by a corporation to advance the action. An example of voluntary corporate action is a tender offer. A corporation can request share holders to tender their shares at a predetermined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the agents of the corporation and that corporation will send the proceeds of the action to the shareholders who elect to participate. Sometimes a voluntary corporate action can give a choice on how to achieve the income of the action. For example, in the case of a cash / stock dividend option, shareholders may choose to take the dividend income as cash or additional shares of the corporation. Other types of voluntary action include rights issue, offering buy-back to shareholders while removing the company from the stock market list.
  3. Compulsory Corporate Action at will: This corporate action is a mandatory corporate action under which shareholders are given multiple options for election. An example is a cash / stock dividend, one of which is in the form of default. Shareholders may or may not submit their election. If a share holder does not submit his election, the default option will be applied in such a situation.

Extra knowledge about Corporate Action:-

When a company announces a corporate action, the registered shareholders are informed of the incident by the company registrar. Financial data vendors collect this type of information and distribute it either through their own services to institutional investors, financial data processors or in the case of individual investors through an online portal.

Conclusion:-

It’s been concluded from the above article that corporate actions such as share splitting may have an indirect effect, as increased liquidity of the share may increase the value of the share. Certain corporate actions such as name changes have no direct economic impact on shareholders.

 

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