Corporate Actions Defined

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.

2. Spin-offs

Spin off means a company breaking up itself into smaller units. The reason for such action is to maintain a focus on core competencies.

3. Buyback

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

Rights Issue

Issue of shares at par or at a premium by an existing company to its shareholders in a certain proportion (and additional shares, if available) to their holdings, as a matter of their right to receive preferential treatment. An existing shareholder, instead of subscribing to such an issue, can let his rights lapse, or renounce his rights in favour of another person (free, or for a consideration) by signing the renunciation form. The renouncer may or may or may not have the right to apply for shares additional to his entitlement, depending upon the terms the company attaches to the renunciation of rights.

What are Dividends and when they're issued?

If you've ever owned stocks or held certain other types of investments, you might already be familiar with the concept of dividends.

Even those people who have made investments that paid dividends may still be a little confused as to exactly what dividends are, however… after all, just because a person has received a dividend payment doesn't mean that they fully appreciate where the payment is coming from and what its purpose is.

If you have ever found yourself wondering exactly what dividends are and why they're issued, then the information below might just be what you've been looking for.

Defining the Dividend

Dividends are payments made by companies to their stockholders in order to share a portion of the profits from a particular quarter or year. The amount that any particular stockholder receives is dependent upon how many shares of stock they own and how much the total amount being divided up among the stockholders amounts to. This means that after a particularly profitable quarter a company might set aside a lump sum to be divided up amongst all of their stockholders, though each individual share might be worth only a very small amount potentially fractions of a cent, depending upon the total number of shares issued and the total amount being divided. Individuals who own large amounts of stock receive much more from the dividends than those who own only a little, but the total per-share amount is usually the same.

When Dividends Are Paid

How often dividends are paid can vary from one company to the next, but in general they are paid whenever the company reports a profit. Since most companies are required to report their profits or losses quarterly, this means that most of them have the potential to pay dividends up to four times each year. Some companies pay dividends more often than this, however, and others may pay only once per year. The more time there is between dividend payments can indicate financial and profit problems within a company, but if the company simply chooses to pay all of their dividends at once it may also lead to higher per-share payments on those dividends.

Why Dividends Are Paid

Dividends are paid by companies as a method of sharing their profitable times with the stockholders that have faith in the company, as well as a way of luring other investors into purchasing stock in the company that is paying the dividends. The more a particular company pays in dividend payments, the more likely it is to sell additional common stock… after all, if the company is well-known for high dividend payments then more people will want to get in on the action. This can actually lead to increases in stock price and additional profit for the company which can result in even more dividend payments.

Getting the Most Out of Your Dividends

In order to get the most out of the dividends that you receive on your investments, it is generally recommended that you reinvest the dividends into the companies that pay them. While this may seem as though you're simply giving them their money back, you're receiving additional shares of the company's stock in exchange for the dividend. This will increase future dividend payments (since they're based upon how much stock that you own), and can set you up to make a lot more money than the actual dividend payment was for since increases in stock prices will affect the newly-purchased stock as well.

What is a stock split? Why do stocks split?

All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split. 

A stock's price is also affected by a stock split. After a split, the stock price will be reduced since the number of shares outstanding has increased. In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares and the stock price change, the market capitalization remains constant.

A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

A stock split can also result in a stock price increase following the decrease immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices. Another reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing and people assume this growth will continue in the future, and again, lift demand and prices.

Another version of a stock split is the reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted (many stock exchanges will delist stocks if they fall below a certain price per share). For example, in a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would now become two million shares outstanding at $2.50 per share. In both cases, the company is worth $50 million.

The bottom line is a stock split is used primarily by companies that have seen their share prices increase substantially and although the number of outstanding shares increases and price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to small investors and provides greater marketability and liquidity in the market.

Liquidity

What Does Liquidity Mean?

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can by easily bought or sold, are known as liquid assets.

2. The ability to convert an asset to cash quickly. Also known as "marketability".

There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios.

Investopedia explains Liquidity

1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.

2. Examples of assets that are easily converted into cash include blue chip and money market securities.

Marketable Securities

What Does Marketable Securities Mean?

Very liquid securities that can be converted into cash quickly at a reasonable price.

Marketable securities are very liquid as they tend to have maturities of less than one year. Furthermore, the rate at which these securities can be bought or sold has little effect on their prices.

Investopedia explains Marketable Securities

Examples of marketable securities include commercial paper, banker's acceptances, Treasury bills and other money market instruments.

De-listing

What Does De-listing Mean?

The removal of a listed security from the exchange on which it trades. Stock is removed from an exchange because the company for which the stock is issued,  whether voluntarily or involuntarily, is not in compliance with the listing requirements of the exchange.

Investopedia explains De-listing

The reasons for delisting include violating regulations and/or failing to meet financial specifications set out by the stock exchange. Companies that are delisted are not necessarily bankrupt, and may continue trading over the counter.

In order for a stock to be traded on an exchange, the company that issues the stock must meet the listing requirements set out by the exchange. Listing requirements include minimum share prices, certain financial ratios, minimum sales levels, and so on. If listing requirements are not met by a company, the exchange that lists the company's stock will probably issue a warning of non-compliance to the company. If the company's failure to meet listing requirements continues, the exchange may delist the company's stock.  

Reverse Stock Split

What Does Reverse Stock Split Mean?

A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

Investopedia explains Reverse Stock Split

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It's usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

Demand

What Does Demand Mean?

An economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa. 

Investopedia explains Demand

Think of demand as your willingness to go out and buy a certain product. For example, market demand is the total of what everybody in the market wants.

Businesses often spend a considerable amount of money in order to determine the amount of demand that the public has for its products and services. Incorrect estimations will either result in money left on the table if it’s underestimated or losses if it’s overestimated.

Market Capitalization

What Does Market Capitalization Mean?

The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determining a company's size, as opposed to sales or total asset figures.

Frequently referred to as "market cap".

Investopedia explains Market Capitalization

If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).

Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual funds. The term should not be confused with a company's "capitalization," which is a financial statement term that refers to the sum of a company's shareholders' equity plus long-term debt.

The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Investment professionals differ on their exact definitions, but the current approximate categories of market capitalization are:

Large Cap: $10 billion plus and include the companies with the largest market capitalization.

Mid Cap: $2 billion to $10 billion

Small Cap: Less than $2 billion

Shareholder

What Does Shareholder Mean?

Any person, company, or other institution that owns at least one share in a company.

A shareholder may also be referred to as a "stockholder".

Investopedia explains Shareholder

Shareholders are the owners of a company. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.

Stock Split

What Does Stock Split Mean?

A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

In the U.K., a stock split is referred to as a "scrip issue", "bonus issue", "capitalization issue" or "free issue".

Investopedia explains Stock Split

For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds.

One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots.

For example, if a XYZ Corp.'s shares were worth $1,000 each, investors would need to purchase $100,000 in order to own 100 shares. If each share was worth $10, investors would only need to pay $1,000 to own 100 shares.

Market

What Does Market Mean?

1. A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand. 

2. The general market where securities are traded.

3. People with the desire and ability to buy a specific product/service.

Investopedia explains Market

1. Markets do not necessarily need to be a physical meeting place. Internet-based stores and auction sites are all markets in which transactions can take place entirely online and where the two parties do not ever need to physically meet. 

2. If a broad market index (such as the S&P 500) fell, people might say that "the market was down," using the S&P 500 as a proxy to represent the overall market's performance.

3. For example, "the widget market" is referring to all the people who will buy widgets.

Outstanding Shares

What Does Outstanding Shares Mean?

Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock. 

Also referred to as "issued and outstanding" if all repurchased shares have been retired.

Investopedia explains Outstanding Shares

This number is shown on a company's balance sheet under the heading "Capital Stock" and is more important than the authorized shares or float. It is used to calculate many metrics, including market capitalization and earnings per share (EPS).

Shares

What Does Shares Mean?

A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares.

Investopedia explains Shares

In the past, shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Today, brokerages have electronic records that show ownership details. Owning a "paperless" share makes conducting trades a simpler and more streamlined process, which is a far cry from the days were stock certificates needed to be taken to a brokerage before a trade could be conducted. 

While shares are often used to refer to the stock of a corporation, shares can also represent ownership of other classes of financial assets, such as mutual funds.

Public Company

What Does Public Company Mean?

A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange or in the over the counter market. Although a small percentage of shares may be initially "floated" to the public, the act of becoming a public company allows the market to determine the value of the entire company through daily trading. 

Public companies have inherent advantages over private companies, including the ability to sell future equity stakes and increased access to the debt markets.  With these advantages, however, comes increased regulatory scrutiny and less control for majority owners and company founders. 

Investopedia explains Public Company

Once a company goes public, it has to answer to its shareholders. For example, certain corporate structure changes and amendments must be brought up for shareholder vote. Shareholders can also vote with their dollars by bidding up the company to a premium valuation or selling it to a level below its intrinsic value.

Public companies must meet stringent reporting requirements set out by the Securities and Exchange Commission (SEC), including the public disclosure of financial statements and annual 10-k reports discussing the state of the company. Each stock exchange also has specific financial and reporting guidelines that govern whether a stock is allowed to be listed for trading.

What is day trading?

Day Trading is the act of buying and selling securities intra-day with the expectation of making fast profits within minutes to hours. Popularized during the bull market of the late 1990s, day trading is the practice of buying and selling stocks over a very short period of time, typically one day. Once the domain of floor traders and investment banks, the availability of inexpensive computers and fast Internet access has brought day trading to the masses.

Day traders come in all shapes and forms, using mechanical to systematic day trading systems, and can place anywhere from one to thousands of trades per day.

Day trading strategies typically follow one of two approaches: beating the spread or attempting to catch short term trends. The spread is the difference between what is being offered for a stock (the bid) and the price being asked for the stock (the ask). Spread trading attempts to buy at the bid and sell at the ask, over and over again. Spread traders may make hundreds or even thousands of such trades a day. With the advent of spreads as low as one penny, spread trading has become much less profitable than it once was.

Counter-trend traders will look for signs that a stock is topping or bottoming out before they place a trade in the opposite direction. For example, reversal traders use tools such as the TICK, TICKI, Put Call Ratio, volume, etc. to anticipate a change in trend.

The term “day trading” is a widely misused and misunderstood term. Real day trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight. This is really the safest way to do day trading because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks.

Unfortunately, many people who claim to be “day trading,” hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital. When day trading currencies, the term “day trading” changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as “overnight” trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.

Day trading is an investment tactic that does online daily stock trading with a relatively short investment. Those who do day trading usually buy and sell securities during the same market day and, as a general rule, do not hold stocks overnight. Many day traders make dozens of trades every market day hoping to capture profits that arise from small intraday price fluctuations..

You basically watch the stock market all day long, buy and sell multiple times throughout the day, trying to buy it low and selling it high and then rebuying it when it drops back down, etc. Very dangerous, and hard to do. Studies have shown day traders do worse in the long run than buying stocks and holding onto them for longer terms. Plus you have to pay commission or fees every time you buy and sell, and taxes on your capital gains are higher for stocks held for less than a year.

Why Companies Buy Back?

Buy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces and hence the market capitalisation as per below relation: 

Market capitalisation = Market value * Number of shares outstanding 

From a corporate point of view what could be a better investment than investing in its own shares. But why would a company invest in itself is what many of us will ponder about. Here is the answer!!  

Firstly, consider a company which possesses huge cash reserve but has no upcoming projects to invest into. In that case the company may plan to invest in itself and offer the existing shareholders an option to sell their shares to the company at an attractive price. It is similar to reinvesting its cash in itself which also aims at bringing in dilution in the markets as outstanding shares in the market are reduced. 

Secondly, a company may also go for buybacks with an aim of projecting better valuation of their stocks when they think it is undervalued in the market. The reason is companies buy its shares at higher price than current market price which indicates that its worth in the market is more than the present value. This in turn shoots up company’s stock prices post buy back. 

Thirdly, some companies may also use it as a tool to change their capital structure i.e. debt-equity ratio in specific. By buying back the shares from open market, a company may increase its reliance on the debt financing rather than equity financing. Moreover interest payment on debt is tax deductible. So after tax cost of debt is quite lesser than shareholders return on equity. 

Fourthly, companies also go for buyback with intent of projecting better financial ratios as indicated below: 

EPS: Earnings per share = Earnings/ Shares outstanding

Since outstanding shares reduce, the company’s earnings are now divided amongst less number of shares for calculating EPS value. From investor’s point of view, higher the earnings per share, better it is as an investment option. Thus even though the earnings of a company are still the same, but EPS value post buyback is increased.  

RoA and RoE

When a company buys its stock, the cash assets on its balance sheets reduce. This increases the return on the assets value. And further due to reduction in the outstanding shares in the market, the RoE value also shoots up.  

This is all about the company’s intent of investing its cash in itself, but from the investor’s perspective, buybacks are most of the times euphoric. The reason is : either they will end up making profit by selling them to company at an attractive price or it leads to higher stock price due to reduction in outstanding shares in the open market . But as a common investor, what one should be careful about is the fundamentals of the company going for any corporate action. 

Legally, The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956. These were inserted by the Companies (Amendment) Act, 1999. The Securities and Exchange Board of India (SEBI) framed the SEBI(Buy Back of Securities) Regulations,1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.

SEBI(Buy Back of Securities) Regulations,1999

THE GAZETTE OF INDIA
EXTRAORDINARY
PART II SECTION 3 - SUB-SECTION (ii)
PUBLISHED BY AUTHORITY
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 21^st August 2006

SECURITIES AND EXCHANGE BOARD OF INDIA (BUY-BACK OF SECURITIES) (AMENDMENT) REGULATIONS, 2006.

S.O. No. 1331 (E).  In exercise of powers conferred by sub-section (1) of section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) read with clause (f) of sub-section (2) of Section 77A of the Companies Act, 1956 (1 of 1956) the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 1998, namely:-

1.      These Regulations may be called the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations, 2006.

2.      They shall come into force on the date of their publication in the Official Gazette.

3.      In the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 1998, in Schedule IV, for paragraph (1), the following paragraph shall be substituted, namely:-

“(1). Every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board, pay fees as set out below:-

Offer size	Fee (Rs.)
Less than or equal to one crore rupees	1,00,000
More than one crore rupees, but less than or equal to five crore rupees	2,00,000
More than five crore rupees, but less than or equal to ten crore rupees	3,00,000
More than ten crore rupees	0.5% of the offer size”

F.No. SEBI\LAD\DOP\ 2108 \2006

M. DAMODARAN

CHAIRMAN

SECURITIES AND EXCHANGE BOARD OF INDIA

Footnotes:
1. Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, the principal regulations, were published in the Gazette of India on November 14, 1998; vide S.O. No. 975 (E).       

2. It was subsequently amended –

(a)   on September 21, 1999 by SEBI (Buy-Back of Securities) (Amendment) Regulations, 1999 vide S.O. 776 (E).

(b)   on November 28, 2001 by SEBI (Buy-Back of Securities) (Amendment) Regulations, 2001 vide S.O. 1181(E).

(c)   on June 18, 2004 by SEBI (Buy-Back of Securities) (Amendment) Regulations, 2004 vide S.O. 745 (E).