Corporate action refers to any action taken by a company that can impact its shareholders. These actions include issuing dividends, stock splits, mergers, acquisitions, etc. The purpose of corporate actions is to bring significant changes within a company and require approval from the board of directors and shareholders.
- What Is Corporate Action?
- Corporate Actions Examples
- Types Of Corporate Actions
- Corporate Action Life Cycle
- List Of Corporate Actions
- Corporate Action Meaning – Quick Summary
- What Is Corporate Action – FAQs
What Is Corporate Action?
Corporate action refers to any event or decision undertaken by a publicly traded company that can impact its shareholders and other stakeholders. These actions are taken to bring about significant changes within the company. Corporate actions include dividend payments, stock splits, mergers and acquisitions, spin-offs, rights issues, bonus issues, share buybacks, and company name or ticker symbol changes.
The company’s board typically approves the corporate actions of directors and may require shareholders’ approval in certain cases. They can directly impact the company’s stock price, shareholder value, and overall financial health.
Corporate Actions Examples
Corporate actions include stock splits, dividend payments, mergers and acquisitions, rights issues, and spin-offs. These significant decisions usually require the approval of the company’s board of directors and the authorization of its shareholders.
- Stock Split
A company may split its existing shares into multiple shares, known as a stock split. For instance, in a 3-for-1 stock split, each shareholder would receive three shares for every share they own. It will effectively increase the total number of shares outstanding while simultaneously reducing the price per share. The purpose of a stock split is to make the shares more affordable and accessible to a broader range of investors by lowering the price per share.
Companies may distribute a portion of their profits to shareholders as dividends. These can be cash dividends, where shareholders receive a cash payment per share, or stock dividends, where additional shares are issued to shareholders. For example, Company XYZ has declared a dividend of Rs. 2 per share for its shareholders. If an investor owns 100 shares of XYZ, they would be eligible to receive a cash dividend of Rs. 200 (Rs. 2 per share x 100 shares).
- Mergers and Acquisitions
When two companies combine or one company acquires another, it is a corporate action known as a merger or acquisition. This can result in changes to the ownership structure and operations of the companies involved, and shareholders may receive shares or cash as part of the transaction.
Types Of Corporate Actions
Corporate actions include mandatory ones (like mergers, stock splits, and bonus issues) requiring shareholder participation, voluntary ones (like rights issues and tender offers) that shareholders can opt into, and mandatory actions with options (like choosing dividend payment forms) where shareholders select from multiple choices.
- Mandatory Corporate Actions
These actions are compulsory for all shareholders and are initiated by the company’s board of directors. Examples of mandatory corporate actions such as mergers and acquisitions, stock splits (dividing existing shares into multiple shares), bonus issues (issuing additional shares to existing shareholders), and spin-offs (creating a new independent company from a division of an existing company).
- Voluntary Corporate Actions
The company’s board of directors initiate these actions but allows shareholders to participate or not. Examples of voluntary corporate actions include rights issues (offering existing shareholders the right to purchase additional shares at a discounted price) and tender offers (inviting shareholders to sell their shares back to the company at a specified price).
- Mandatory Corporate Actions with Options
The company’s board of directors initiates these actions and provides shareholders with different options. Shareholders must choose among the available options, and if no choice is made within a specified timeframe, a default option is applied. An example of a mandatory corporate action with options is the choice between receiving dividends in the form of cash or stock.
Corporate Action Life Cycle
The Corporate Action Life Cycle encompasses the complete journey of a corporate action managed by the processing team. It includes various stages, from the event’s initial announcement to crediting the entitlements to the shareholders’ accounts. All the necessary tasks and processes related to the corporate action are executed and monitored throughout this cycle.
List Of Corporate Actions
Here are six common corporate actions and how they might impact your investments:
- Name or Trading Symbol Changes
When a company changes its name or trading symbol, it can affect how your investments are identified in your account statements and holdings. It’s important to be aware of these changes to ensure accurate tracking of your investments.
- Stock Splits
A stock split involves increasing the number of shares outstanding and, at the same time, reducing the price per share. This can impact your investments by adjusting the number of shares you own without changing the overall value of your investment. For instance, in a 3-for-1 stock split, each shareholder would receive three shares for every share they own.
Dividends are distributions of a company’s earnings to its shareholders. They can impact your investments by providing you with additional income in the form of cash or additional shares. Dividends signify a company’s financial health and may attract investors seeking regular income.
- Mergers and Acquisitions
Mergers occur when two companies combine to form a new entity, while acquisitions involve one company acquiring another. These actions can impact your investments by changing the value and prospects of the companies involved. Shareholders of the acquired company may receive compensation in the form of cash, stock, or a combination of both.
- Rights Offering
It allows shareholders to buy extra shares from the company at a discounted price. This can impact your investments by allowing you to increase your company ownership. Participating in a rights offering can require additional investment and should be evaluated based on your investment strategy and outlook for the company.
- Liquidation and Dissolution
Liquidation occurs when a company sells off assets and distributes the proceeds to creditors and shareholders. Dissolution marks the final stage of closing down the business. It’s important to note that common stockholders are typically the last to receive proceeds.
Corporate Action Meaning – Quick Summary
- Corporate action refers to any event or decision a company takes that can impact its shareholders. Examples of corporate actions include dividend payments, stock splits, mergers and acquisitions, rights issues, bonus issues, share buybacks, and company name or ticker symbol changes.
- Corporate action refers to events or decisions by a publicly traded company that can affect shareholders, such as dividend payments, stock splits, mergers, and acquisitions, with a potential impact on stock price and shareholder value.
- For example, ABC Corporation announces a 3-for-1 stock split, resulting in each shareholder receiving three shares for every one share they own. The stock price per share is adjusted accordingly, making the shares more affordable and accessible to investors.
- corporate actions include stock splits, dividend payments, mergers and acquisitions, and rights issues.
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What Is Corporate Action – FAQs
What is meant by corporate action?
Corporate actions refer to actions taken by a company that directly impact the value of its shareholders’ investments. For instance, they can involve the distribution of dividends, the issuance of bonus shares, granting of rights to existing shareholders, or the implementation of stock splits.
What is the purpose of a corporate action?
Companies utilize corporate actions for various reasons, and one of the main objectives is to distribute profits back to their shareholders. This can be achieved through cash dividends, where a publicly traded company announces a dividend for each share held by the shareholders. Another example is the issuance of bonus shares, which serve as a reward for the shareholders.
What are the 2 main types of corporate actions?
The two main types of corporate actions are:
- Mandatory actions – Mandatory actions are decisions made by the company that affect all shareholders, such as stock splits or mergers.
- Voluntary actions – This allows shareholders to choose whether or not to participate, such as tender offers or rights issues.
Who is eligible for corporate action?
If you hold shares in your demat account on or before the record date, regardless of any debit or credit balances, you are entitled to corporate benefits.
Who processes corporate actions?
Corporate actions include stock splits, mergers and acquisitions, rights issues, dividend distributions, and spin-offs. These important decisions usually require the approval of the company’s board of directors and the authorization of its shareholders.
What is the fee for corporate action?
The processing fees for corporate actions on listed equity shares amount to Rs. 20,000/- plus 18% GST. This is a one-time payment required for the processing of corporate actions.
Who prepares corporate reports?
The company’s management is accountable for preparing the annual reports, which can only be published with including the financial statements. The financial statements are a compulsory component of the annual reports.