Companies, in their journey, take various actions to increase profitability, show their confidence towards future growth, expand operations, reward shareholders, impact share price and much more. Corporate action lifecycle, i.e. how companies carry the entire process of the corporate action, is one of the indicators of the company’s financial health.
This article covers the meaning of corporate actions, various corporate actions and their impact on stock prices with real-world examples.
What Are Corporate Actions?
Corporate actions refer to various actions taken by the company after the approval of its board of directors that aim to bring material change to the company and its stakeholders. The company and the stock exchanges where the company is listed announce such corporate actions in advance to inform the shareholders and general public.
Types Of Corporate Actions And Their Impact On Stock prices
Mandatory corporate actions
Mandatory corporate actions are those where all investors, without effort, get affected by the action taken. They do not have the choice of whether to participate or not. Here are some kinds of mandatory corporate actions.
Dividend payout
Dividends are the parts of the company’s earnings it distributes among shareholders as a reward for holding its shares. Though companies are not obliged to pay, some regularly pay dividends. And some companies opt to use the profit for growth and expansion of the business.
Usually, companies pay dividends in terms of the face value of a share and on a per-share basis. On the ex-dividend date (the date from which the shares bought would not offer dividend benefits), the share price drops by the dividend paid per share.
Since the paid dividends no longer appear in the company’s balance sheet, the stock price decreases to factor this cash out in the balance sheet.
Example
Vedanta Limited declared an interim dividend of ₹17.5 per share on November 22, 2022, which is 1750% of the face value of a share (₹1). A shareholder with 100 shares would receive a total dividend of ₹1,750.
Suppose Vedanta Limited is traded at ₹312 before the ex-dividend date. On the ex-dividend date, the price will drop to ₹294.5 (₹312 – 17.5) per share.
Bonus issue
Companies may go for bonus issues to reward existing shareholders or increase retail participation. Bonus shares are extra shares the company offers to its existing shareholders as a bonus, i.e. without any additional costs, in proportion to the number of shares they already hold.
In the bonus issue, the total investment by the investor remains the same because the price per share proportionally decreases.
Example
Easy Trip Limited announced a 3:1 bonus issue on October 10, 2022. It means if the investor had 100 shares of that company before the bonus issue, he would have a total of 400 shares (100 original + 300 bonus shares) post the bonus issue.
If the stock of Easy Trip Limited traded at ₹68 per share pre-bonus issue, it would trade at the new price of ₹17 per share following the bonus issue. The investor’s total investment remains the same, i.e. ₹6,800 before and after the bonus issue.
Stock split
The stock split is that corporate action in which the company splits its existing one share into multiple shares. In this, the company’s market capitalisation remains unchanged because its total number of outstanding shares increases, whereas the price of an individual share proportionally decreases.
The existing investors’ total investment value also remains the same, and the face value of a share decreases in proportion to the stock split ratio.
Example
Bajaj Finserv Limited announced a 1:5 stock split with a record date of September 14, 2022. A share with a face value of ₹5 was split into five shares with a face value of ₹1 per share post the stock split. If the investor had one share of ₹17,000 per share pre-bonus issue, it would have become five shares of ₹3,400 per share following the bonus issue.
Voluntary Corporate actions
In the case of voluntary corporate actions, the investors can decide whether to participate in the corporate action or not. Those investors who choose to participate get primarily affected by these corporate actions. Here are some kinds of voluntary corporate actions.
Rights issue
The rights issue is one of the ways by which companies raise capital. In a rights issue, the company offers new shares to existing shareholders, at a discounted price, in proportion to the number of shares they hold. In rights issues, the existing shareholders have rights but not obligations to subscribe to the issue. They may go for it if they are confident about the company’s potential.
Example
Suzlon Energy Limited announced a rights issue in the ratio of 5:21, meaning investors got the right to purchase five shares for every twenty-one shares they owned. The issue price was fixed at ₹5 per share, i.e. at nearly 45% discount from the previous day’s closing price of ₹9.09.
Buyback of shares
A share buyback is a corporate action in which a company opts to buy its own stock from the current shareholders by paying them a price higher than the market price of a share. By reducing the shares floating in the market, the company may try to consolidate its stake or prevent other companies from taking over more.
Example
CARE Ratings Limited did a buyback of shares amounting to a total of ₹121.95 cr. The price set for buyback was ₹515/share.
Takeaways
It is important to understand corporate actions as they impact stock prices and how the company will perform further. A sudden increase or decrease in the stock price can sometimes result from corporate actions. Plus, they may bring short-term volatility based on how investors feel about the company’s move. Thus, learning about corporate actions may guide investment decisions.
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FAQs
Several factors affect stock prices. Four of the key factors influencing the stock prices are fundamental factors (valuation multiples, company’s earnings, etc.), economic factors (interest rates, inflation, government policies, etc.), corporate actions (dividend declaration, bonus issue, rights issue, etc.), investor sentiments (bullish or bearish market phase).
Companies take corporate actions for various reasons, such as rewarding shareholders, increasing profitability, corporate restructuring, etc.
Yes, a buyback is a corporate action in which the company buys back its shares from the existing shareholders to reduce outstanding shares in the market or for other such reasons.
Companies go for various corporate actions for various purposes. For instance, companies going for mergers and acquisitions may intend to do corporate restructuring, whereas dividend declarations, bonus issues, etc., may be performed to benefit shareholders.
Investors who possess shares of the concerned company as on the record date (the date prefixed by the company on which it checks out company records to find existing shareholders) are eligible to receive benefits of corporate actions.
