Corporate actions are the actions initiated at the corporate level having material impact on the company’s financial structure and ultimately the stakeholders who are the owners of company. 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. Why a decision/action taken at the corporate level is important for a common investor is what is explicated here.
Following is the brief description of common corporate actions initiated by the companies and reasons of such initiatives of the companies:
1. Stock split and reverse spilt
Stock split involves splitting up of a stock into smaller units that reduces the stock price keeping market capitalisation remains the same. 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 off means a company breaking up itself into smaller units. The reason for such action is to maintain a focus on core competencies.
Buyback is an action in which company offers to buys back its stock from the current shareholders at an attractive price. The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company.
4. 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. Mergers and acquisitions
A merger 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.
6. 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.
7. 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.
Below instances of recent corporate actions from few of Indian companies would help get a clearer picture of what corporate actions are;
1. SBI came up with rights issue for which the record date was fixed as 04-feb-2008. The company fixed the right issue price as rs 1590 with aiming to raise Rs.16,736 crore from the existing shareholders. The right share ratio was set as 1:5 that means 1 right share will be issued for every 5 shares held.
2. L&T came up with bonus issue of 1:1 for the record date was 03-oct-2008.
3. Visual soft Technologies and Mega soft Limited decided to merge with an effective date of 29-mar-2007. The record date for the same was 9-may-2007
4. DLF India ltd came up with a buy back offer