Corporate Action

• It is an “event” initiated by a public company that

affects the securities (equity or debt) issued by the
company, company’s financial structure and
ultimately the stakeholders
 Types of Corporate Actions
Corporate actions are classified as:
• Voluntary
• Mandatory and
• Mandatory with choice
 Types of Corporate Actions Contd..
• Mandatory Corporate Action:
It is an event initiated by the corporation and by the
board of directors, that affects all shareholders.
Participation of shareholders is mandatory for these
corporate actions.
An example of a mandatory corporate action is cash
dividend. All holders are entitled to receive the dividend
payments, and a shareholder does not need to do anything to
get the dividend.
Other examples of mandatory corporate actions
include stock splits, mergers, pre-refunding, return of capital,
bonus issue, asset ID change, pari-passu and spinoffs.
Strictly speaking the word mandatory is not
appropriate because the share holder doesn't do anything. In
all the cases cited above the shareholder is just a passive
beneficiary of these actions. There is nothing the Share
holder has to do or does in a Mandatory Corporate Action.
 Types of Corporate Actions Contd..
• Voluntary Corporate Action:
These are actions requiring a decision from the
investor on whether or not to participate.
Companies 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.
Types of Corporate Actions Contd..
• Mandatory with Choice:
This corporate action is a mandatory
corporate action where share holders are
given a chance to choose among several
options
An example is cash or stock
dividend option with one of the options as
default
 A list of Corporate Actions Events /
Corporate Actions Types
• For EQUITIES:

Mandatory Events
 Mergers
A merger occurs when two or more companies combine into one
while all parties involved mutually agree to the terms of the merge. The
merge usually occurs when one company surrenders its stock to the other.
Both companies' stocks are surrendered and new company stock is
issued in its place.For example, in the 1999 merger of Glaxo Wellcome and
SmithKline Beecham, both firms ceased to exist when they merged, and a
new company, GlaxoSmithKline, was created. In practice, however, actual
mergers of equals don't happen very often. Usually, one company will buy
another and, as part of the deal's terms, simply allow the acquired firm to
proclaim that the action is a merger of equals, even if it is technically an
acquisition. Being bought out often carries negative connotations;
therefore, by describing the deal euphemistically as a merger, deal makers
and top managers try to make the takeover more palatable. An example of
this would be the takeover of Chrysler by Daimler-Benz in 1999 which was
widely referred to as a merger at the time.
 Acquisition
Acquisition means a bigger company acquiring a
smaller one for further expansion. The
acquiring company often offers a premium on
the market price of the target company's
shares in order to attract shareholders to sell.
For example, News Corp.'s bid to acquire Dow
Jones was equal to a 65% premium over the
stock's market price.
 Bonus Issue
• Also known as Stock Dividend
• Shareholders are awarded additional securities
(shares, rights or warrants), in proportion to their
holding, free of payment
• A company calls a Bonus Issue to increase the
liquidity of the company's shares in the market.
Increasing the number of shares in circulation reduces
the share price.
• Theoretical example, company ABC calls a 1 for 4
Bonus issue:
For every four shares you own in ABC you will
receive one additional free share i.e. you will own 5
shares of ABC after the issue
 Cash Dividend
• Distribution of cash to shareholders, in
proportion to their equity holding
• Effects of a Dividend on the share price
Example, if an investor owns 100 shares and the cash
dividend is Rs. 0.50 per share, the owner will receive
Rs. 50 in total.
• Shareholders in companies which pay little or no cash
dividends can reap the benefit of the company's profits
when they sell their shareholding, or when a company
is wound down and all assetsliquidated and distributed
amongst shareholders
• The face value of the shares will not be affected
 De-merger
A business strategy in which a single business is broken into
components, either to operate on their own, to be sold or to
be dissolved.
A de-merger allows a large company, such as a
conglomerate, to split off its various brands to invite or prevent an
acquisition, to raise capital by selling off components that are no
longer part of the business's core product line, or to create
separate legal entities to handle different operations.
For example, in 2001, British Telecom conducted a de-
merger of its mobile phone operations, BT Wireless, in an attempt
to boost the performance of its stock. British Telecom took this
action because it was struggling under high debt levels from the
wireless venture. Another example would be a utility that
separates its business into two components: one to manage the
utility's infrastructure assets and another to manage the delivery
of energy to consumers.
 Spin-off
• The event through which a new company is created and separated
from its parent company. After the event there are 2 separate
companies, each with their own outstanding share capital.
• Shareholders of the parent company will be given some amount of
shares in the spun off company according to a ratio (for example,
each shareholder in parent company A will receive 5 shares in the
spun off company B). Each shareholder holds shares in company A
as well as in B at the moment of the spinoff.
• Spin-offs may also be motivated by a desire to benefit the
stockholders by improving the stock price. It is difficult to
determine the strength of several unrelated businesses that are
part of the same company. As a result, the market inevitably
undervalues these companies. Therefor, a spin- off will help a
Company to clearly value the strength of two separate companies
properly
 Stock split
• 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 stock split increases the stock
price while reducing number of outstanding shares.
 Mandatory Events with Options
• Cash Dividend
• Merger and Acquisition and
• Spin Off
Voluntary Events
 Buy-back program / Repurchase Offer
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.
A company may decide to reduce its capital when it has
excess liquidity and an insufficient return on equity. By
repurchasing its own shares, the company automatically
reduces its cash balance. The subsequent destruction of
shares (the actual capital reduction) then reduces its equity
capital, so that the return on equity increases
Example, In the spring of 2000, Royal Philips Electronics
announced a capital reduction. The group’s share capital was
reduced by 3%, and EUR 1.7bn was paid out to shareholders
in the process.
Philips paid EUR 1.26 per share and each block of 100 shares
was replaced by 97 shares.
 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.
It provides its existing shareholders the right
to buy the stock at discounted rates
Assume company XYZ has announced rights
issue in the ratio of 5:2 (for every 5 shares
additional 2 shares are offered). If you hold 100
shares of XYZ then you will be entitled to get 40
(100 * 2/5) new shares of XYZ.
Corporate Actions For BONDS:
 Conversion of convertible bonds
A bond that can be converted into a predetermined
amount of the company's equity at a given time, usually at
the discretion of the bondholder

Issuing convertible bonds is one way for a company to

minimize negative investor interpretation of its corporate
actions.

For example, if an already public company chooses to

issue stock, the market usually interprets this as a sign that
the company's share price is somewhat overvalued. To avoid
this negative impression, the company may choose to issue
convertible bonds, which bondholders will likely convert to
equity anyway should the company continue to do well.
 Other Corporate actions with regard to
Bonds
• Coupon Payment - interest payment
The issuer of the bond pays interst according to the
terms and conditions of the bond, ie interest rate.
• Early Redemption
The issuer of the bond repays the nominal prior to the
maturity date of the bond, normally with accrued
interest.
• Partial Redemption
The issuer of the bond repays part of the nominal prior
to maturity, normally with accrued interest.
• Final Redemption
The issuer of the bond repays the nominal of the bond,
normally with accrued interest.
 How a Company announces
Corporate Actions?
Registered shareholders are told of the event
by the company's Registrar.
Such information is disseminated via online
portals
How a Company announces
Corporate Actions? Contd..
How a Company announces
Corporate Actions? Contd..
 Need of Corporate Actions
The primary reasons for companies to
use corporate actions are:
• Return profits to shareholders:
Cash dividends are a classic example where a
public company declares a dividend to be paid
on each outstanding share.
Bonus is another case where the shareholder
is rewarded
 Need of Corporate Actions Contd..
• Influence the share price:
If the price of a stock is too high or too low, the
liquidity of the stock suffers
 Stocks priced too high will not be affordable to all
investors
 Stocks priced too low may be de-listed
Corporate actions such as stock splits or reverse
stock splits increase or decrease the number of
outstanding shares to decrease or increase the stock price
respectively.
Buybacks are another example of influencing the
stock price, where a corporation buys back shares from
the market in an attempt to reduce the number of
outstanding shares thereby increasing the price.
Need of Corporate Actions Contd..
• Corporate Restructuring:
Corporations re-structure in order to
increase their profitability
 Mergers are an example of a corporate
action where two companies that are competitive
or complementary come together to increase
profitability
 Spinoffs are an example of a corporate
action where a company breaks itself up in order
to focus on its core competencies
 Corporate Actions Risks
For many years Corporate Actions
have been known to be very risky. The
smallest mistake can easily result in huge
losses
 Types of Corporate Actions Risks
• Financial risk
A mistake can easily lead to a substantial financial loss
or -gain. (just like making losses, it is also possible to end up
with a gain as a result of a mistake).
• Audit risk
The industry is being closely regulated and auditors
will make sure that every procedure is being adhered to.
Making a profit as a result of devation (intentionally or not) of
procedures is not allowed.
• Trading risk
Failing to make the right decision based on the
information of the event may lead to sub-optimal trading.