Corporate actions
Basics of stock market
• Why invest?
• who regulates
• financial interdependence
• IPOs
• Stock Market returns
• Trading system
• Day end settlements
• Corporate actions
• News and Events
• Getting started
• Rights, ofs,fpo and more
• Notes
8.1 Overview of Corporate Actions
Corporate actions are projects undertaken by a corporate body that alter its stock. An entity has a wide range of corporate action options at their disposal. When deciding whether to buy or sell a particular stock, a thorough understanding of these corporate actions provides a clear picture of the company’s financial health.
The five most significant corporate actions and their effects on stock prices will be examined in this chapter.The board of directors proposes a corporate action,which the company’s shareholders then approve.
8.2 Dividends
The business distributes dividends to its stockholders. In order to share out the company’s annual profits, dividends are paid. On a per-share basis, dividends are paid. For instance, Infosys declared a dividend of Rs. 42 per share for the fiscal year 2012–2013. A percentage of the face value is another way to describe the dividend payment. In the aforementioned instance, Infosys’ face value was Rs. 5 and the dividend was Rs. 42; as a result, the dividend payout is stated to be 840 percent (42/5).
Dividend payments are not required to be made each year. The business has the option to use the same cash to fund a new project for a better future if it decides that doing so would be preferable to paying dividends to shareholders.
Furthermore, dividends don’t have to be paid entirely from profits. The company can still pay dividends from its cash reserves if it had a loss for the year but did have a healthy cash reserve.
Occasionally, paying out dividends might be the best course of action for the business. It would make sense for the company to reward its shareholders in order to repay the faith the shareholders have in the company when the company’s growth opportunities have been exhausted and the company has extra cash.
The Annual General Meeting (AGM), where the company’s directors gather, is where the dividend payment decision is made. Dividends are not paid immediately following the announcement. This is because it would be challenging to determine who receives the dividend and who does not because the shares are traded throughout the year. You can better understand the dividend cycle by looking at the timeline below.
Dividend Declaration Date: This is the date on which the AGM takes place, and the company’s board approves the dividend issue
Ex-Date/Ex-Dividend Date: Two business days prior to the record date is typically the ex-dividend date. The dividend is only payable to shareholders who owned the shares prior to the ex-dividend date. This is so because the standard settlement in India operates on a T+2 basis. Therefore, in all actuality, you must ensure that you purchase the shares prior to the ex-dividend date in order to be eligible to receive a dividend.
Cum Dividend: Up until the ex-dividend date, the shares are referred to as cum dividend.
The stock typically declines to the extent of dividends paid when it goes ex-dividend. For instance, if ITC (currently trading at Rs. 335) announced a dividend of Rs. The stock price will decrease to the extent of the dividend paid on the ex-date; in this instance, ITC’s price will fall to Rs. 330. The amount paid out no longer belongs to the company, which is the cause of the price decrease.
Anytime during the fiscal year, dividend payments may be made. It is known as the interim dividend if it is paid during the fiscal year. The final dividend is the term used when a dividend is paid at the end of the fiscal year.
8.3 Bonus Issue
A stock dividend distributed by a company to its shareholders is known as a bonus issue. The company’s reserves are used to issue the bonus shares. These are free shares that shareholders receive in exchange for the shares they already own. These allocations frequently come in predetermined ratios like 1:1, 2:1, 3:1, etc.
If the ratio is 2:1 ratio, the existing shareholders get 2 additional shares for every 1 share they hold at no additional cost. So if a shareholder owns 100 shares, he will be issued an additional 200 shares, so his total holding will become 300 shares. When the bonus shares are issued, the number of shares the shareholder holds will increase, but an investment’s overall value will remain the same.
When a company’s share price is very high and it becomes difficult for new investors to purchase shares, companies issue bonus shares to encourage retail participation. The example above demonstrates how issuing bonus shares increases the number of outstanding shares while decreasing the value of each share. The face value stays the same.
8.4 Stock Split
The term “stock split” may sound strange to some people at first, but it occurs frequently in the markets. The obvious conclusion from this is that the stocks you currently own have been split.
When the company declares a stock split, the number of shares held increases, but the investment value/market capitalization remains similar to the bonus issue. The stock is split concerning the face value. Suppose the stock’s face value is Rs.10, and there is a 1:2 stock split then the face value will change to Rs.5. If you owned 1 share before the split, you would now own 2 shares after the split.
8.5 Rights Issue
The idea behind a rights issue is to raise fresh capital. However, instead of going public, the company approaches its existing shareholders Think about the rights issue as a second IPO and a select group of people (existing shareholders). The rights issue could be an indication of promising new development in the company. The shareholders can subscribe to the rights issue in the proportion of their shareholding. For example, 1:4 rights issue means every 4 shares a shareholder owns; he can subscribe to 1 additional share. Needless to say, the new shares under the rights issue will be issued at a lower price than what prevails in the markets.
A word of warning, though: The investor should look beyond the company’s discount and not let it influence them. In contrast to a bonus issue, one must pay money to purchase shares in a rights issue. Therefore, a shareholder should only invest if they have complete faith in the company’s future. It is obviously less expensive to purchase it from the open market if the market price is lower than the subscription price or right issue price.
8.6 Buyback of shares
A buyback can be viewed as a way for a company to invest in itself by purchasing shares from other market participants. Although buybacks reduce the number of shares outstanding in the market, they are a crucial corporate restructuring strategy. There may be a variety of factors at play when corporations decide to buy back shares.
- Increase the per-share profitability.
- to increase their ownership of the business.
- to prevent competition from other businesses.
to demonstrate the promoters’ faith in their business. - to prevent competition from other businesses.
to demonstrate the promoters’ faith in their business.
When a company makes an announcement about a buyback, it expresses confidence in the company. Thus, this typically has a positive impact on the share price.