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Corporate Action Types
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Corporate actions are events pertaining to a company that has an impact on its stock price movements. These actions may have a direct or an indirect impact on the share price. It affects the equity and/or debt securities issued by a company.

Corporate actions can be of three types:

  1. Mandatory corporate actions comprises of Stock splits, cash dividend, Bonus issue, mergers, Spinoffs etc.
  2. Voluntary corporate actions involve buyback offers and rights issue.
  3. Mandatory with Choice Corporate Actions are actions where shareholders are presented with options. An example consists of cash or stock dividend option with one of the options as default.

The implementation of some corporate actions requires an approval of the Board of Directors and shareholders. Following is a list of corporate actions that are undertaken by a corporate:

  1. A stock split is an action in which a company divides its existing shares into multiple shares to increase the liquidity of its shares in the market. The most common split ratios are 2:1 or 3:1. Essel Propack Ltd. stock at NSE was trading at Rs. 246 on 19 June’18 and dropped to Rs. 126 the next day, which was its split date with the ratio of 2:1. It meant that the stockholders got two shares respectively, for every share they held earlier.Similarly, in reverse stock split, shares of a company are effectively pooled to form a smaller number of proportionally more valuable shares. This may be used to drive out small investors, decrease volatility or to discourage speculative trading. 
  2. Spin-Offs happen when an existing publicly-traded company sells a portion of its assets or distributes new shares in order to form a newly independent company. 
  3. Dividend Pay-outs: It is the distribution of profits to the investors, a company has made in a quarter or a year. For instance, Reliance Industries limited announced a dividend of Rs. 6 per share on 28 June’18 to its shareholders.
  4. Mergers and Acquisitions: Merger is an event where two or more companies amalgamate into one aiming to be more competitive and profitable. Acquisition implies that a larger company acquires a smaller one for further expansion.
  5. Bonus Issue: It is a surplus dividend given to the shareholders that can be in cash or in the form of stock. When a company gives an outstanding performance with surplus profits, they may agree to give bonus to the shareholders. The New India assurance company Limited announced bonus in the ratio of 1:1 on 15 June’18. It was trading at Rs. 618 but fell down to Rs.312 the next day.
  6. In a rights issue, the company offers additional shares to its existing shareholders. The existing shareholders have the right to acquire or receive shares before they are opened for the public.
  7. When a Buyback happens, the company buys back its stock from the current shareholders at an attractive price to decrease the shares outstanding or to reduce the shareholders’ stake in the company.

 

Every corporate action needs to be informed to the stock exchanges. It is essential to avoid a clash with the listings agreement. Compliance is extremely significant before any corporate action.

Hence, it is important to understand the meaning of these actions and the reason behind them to analyse the impact on price of listed stocks.

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