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Types Of Corporate Actions

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Corporate actions are the actions initiated at the corporate level having material impact on the companies financial structure and ultimately the stakeholders who are the owners of company.  In other words corporate actions are events initiated by issuer of securities that directly or indirectly effects its shareholders or bondholders, whether positively or Negatively. It is important that the investor has a clear picture of what a corporate action indicates about a company’s financial affairs and how that action will influence the company’s share price and performance.This knowledge, in turn, helps investors in determining whether to buy or sell the stock in question. These actions are decided upon by the board of directors with intent of increasing the profitability of the company or for the benefit of the stakeholders.

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Types Of Corporate Actions

Corporate actions are classified as mandatory, voluntary and mandatory with choice corporate actions.

Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. Mandatory Corporate Actions Includes Cash Dividend, Stock Splits, Mergers, Pre-refunding, Return of capital, Bonus Issue, Asset ID Change, Pari-passu and Spinoffs.

  • Stock Split and Reverse Spilt: A corporate action in which a company’s existing shares are divided into multiple shares. For Ex. A company with 100 shares of stock price Rs 50 per share (100*50 = 5000). The company splits it shares 2 for 1. There are now 200 shocks for Rs 25 each (200*25 = 5000) .  The reason why companies split their stock is to make them more affordable to investors because stock price reduces after it is split.  Likewise, reverse split increases the stock price while reducing number of outstanding shares.
  • Spin-Offs: Spin off means a company breaking up itself into smaller units. The creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company.
  • Dividend Payouts: Dividend is the payment made to the investor for sharing the profits a company has made.
  • Mergers and Acquisitions: Mergers is a event where two or more companies merge into one aiming to be more competitive and for more profitability. Likewise Acquisition means a bigger company acquiring a smaller one for further expansion.
  • Bonus Issue: It is an additional dividend given to the shareholders that can be in cash or in the form of stock. When companies have outstanding performance with surplus profit, they may decide to issue bonus to the shareholders.

Voluntary Corporate Action : Voluntary corporate actions, are actions requiring a decision from the investor on whether or not to participate. Corporation will not process these actions automatically because the decision on whether to participate will vary for every investor. Shareholders may chose to take no action which will leave their securities unaffected by the Corporate Action. Voluntary corporate action includes Tender Offer, Rights issue, Making buyback offers to the share holders while delisting the company from the stock exchange etc.

  • Buyback: Buyback is an action in which company offers to buys back its stock from the current share holders at an attractive price. The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company.
  • Rights Issue: It refers to offering additional shares to the current shareholders of the stock. This is done by companies to raise capital for further expansion which provide its existing shareholders the right to buy the stock at discounted rates than price making it more lucrative.
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Mandatory With Choice Corporate Action : This corporate action is a mandatory corporate action for the shareholder but they are being presented with options. An example is cash or stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.

  • Dividend Payouts: Dividend is the payment made to the investor for sharing the profits a company has made. It can be cash dividend or stock dividend where company offers stock as a dividend to the current shareholders.

5 comments

  1. Very well explained article on the basic differences types of corporate actions. Common Investors tend to get confused between them and fail to understand its impact on the company’s performance and the market price. Your article clearly explains the above.Thanks for sharing. All the best.

  2. Hi,

    could you please sent me the details of all mandatory and non mandatory events in detail please.
    Thanks.

  3. Well explained the different types of corporate actions

  4. The explanation about corporate actions is good.

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