What a company does to its shares and its shareholders: pay them, give them more shares, buy shares back, merge, split up, or leave the stock exchange.
Corporate actions are actions a company takes, apart from its business, that directly affect its stakeholders: paying dividends, issuing more shares, buybacks, mergers and acquisitions, restructuring, delisting, raising debt and others. Once a company has made a public issue, the interests of minority investors must be protected.
Corporate actions are regulated by three sets of rules:
Signed with the stock exchange
These include giving notice to regulators and stakeholders and following disclosure norms.
Investors whose names appear in the register of members (physical shares) or the register of beneficial owners kept by the depository (demat shares). To decide this, the company announces a record date or a book closure period. Those on the records on that date are eligible.
Post-tax profit belongs to shareholders. A company can retain it for the business or return it. Returning money to all shareholders in equal proportion is declaring a dividend. Most companies do some of each. How much they pay depends on opportunities to reinvest, the nature of management, shareholders' expectations and, finally, the cash available.
A dividend must be paid within 30 days of declaration.
SEBI requires listed companies to declare dividends in rupees per share, not as a percentage of face value. The book's example: a 50% dividend means Re 1 on a Rs 2 share (company A) but Rs 5 on a Rs 10 share (company B). Same percentage, different money. So A now declares "Re 1 per share" and B declares "Rs 5 per share".
A company that needs more equity can ask existing shareholders or bring in new investors. New investors dilute existing holders. The book's example: a company with 10 lakh shares of Rs 10 (capital Rs 1 crore) issues 10 lakh more to new investors. Capital doubles, so existing holders' share is halved.
To prevent this, the Companies Act requires a company raising more capital through shares to first offer them to existing shareholders. That offer is a rights issue.
1-for-2 rights at Rs 70: one new share for every two held
A can buy 5 more shares at Rs 70
Subscribe, apply for extra shares, let it lapse, or renounce (transfer the right, for money or for free)
More shares outstanding, more cash on the balance sheet
A bonus issue, also called an equity dividend, is an alternative to a cash dividend. Shareholders get new shares free. The company moves money from its reserves into paid-up capital. This is called capitalisation of reserves.
A stock split reduces the face value of each share in a set ratio. Split 1:5 means one share becomes five, and face value falls to one fifth. The book's example: 100 shares of Rs 10 become 500 shares of Rs 2. Share capital does not change (more shares × lower face value).
Companies split when the share price is so high that it limits participation. A lower price per share brings greater liquidity. Like a bonus, it is a book entry with no economic benefit.
The reverse of a split. Consolidation increases face value in a set ratio and reduces the number of shares, keeping paid-up capital the same. Consolidation 5:1 means five shares become one. The book's example: 500 shares of Rs 2 become 100 shares of Rs 10.
Companies consolidate when the share price is so low that it hurts how investors see the company. A higher price can improve that perception.
| Bonus issue | Stock split | Consolidation | |
|---|---|---|---|
| Number of shares | Goes up | Goes up | Goes down |
| Face value | Not discussed in the book. It says reserves move into paid-up capital | Goes down | Goes up |
| Share capital | Goes up (reserves capitalised) | No change | No change |
| Per-share data (EPS, book value, price) | Falls | Falls | Rises |
| Your share of ownership | Same | Same | Same |
| Book's price example | 1:1 bonus: Rs 1,000 to about Rs 500. 100 × 1,000 = 200 × 500 | SBI: above Rs 2,700 to about Rs 295 (1 share became 10) | 5:1: Rs 5 to about Rs 25. 500 × 5 = 100 × 25 |
| Why companies do it | Alternative to a cash dividend; investor psychology | Price too high; improve liquidity | Price too low; improve perception |
These change the ownership structure of the companies involved.
The acquirer buys the target's shares. The target is absorbed into the acquirer and ceases to exist. Its assets and liabilities pass to the acquirer.
The acquirer buys all or a substantial part of the target's stock. Both entities typically continue to exist.
Companies combine to form a new company, and the merged companies cease to exist.
Combined strengths give bigger benefits: economies of scale, forward and backward integration, a bigger market.
Two competitors combining gain revenue and share.
Into a new geography or a complementary business.
A profitable company buys a loss-making one to use its losses as a tax shield.
When an acquirer, and persons acting in concert with it, substantially acquire shares and voting rights in a listed company, SEBI's takeover regulations (named in the book as the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997) set the triggers and give public shareholders a chance to exit if they wish.
A spin-off carves one or more businesses out into a separate company. Shareholders on the record date get shares in the new company in proportion to their holding in the parent.
When a company cannot meet its obligations to creditors or to a class of shareholders (for example, failing to redeem preference shares), the company and its creditors or members can agree a scheme of arrangement.
A company in financial distress, unable to pay its lenders, can change one or more terms of its loans: the amount, the interest rate, the mode of repayment (cash or equity), or the term. The aim is repayment within the borrower's capacity.
A feasible way to repay, without being declared a defaulter. It can focus on rebuilding the business and the balance sheet.
Some repayment on a loan that would otherwise be written off as a bad debt.
The process: analyse the debt position, meet lenders, share current and future financials, and agree a workable plan backed by a concrete business plan.
A company with spare cash can grow the business, repay borrowings, or return money to shareholders. To return it, it can pay a dividend to everyone equally, or offer a buyback: shareholders choose whether to sell shares back, and those who stay get a higher EPS and book value per share.
Give the stock a value boost if it looks undervalued
Excess cash and too few profitable investments
A confidence-building measure
A defence against a possible takeover
Reduce equity and so increase leverage
Offset dilution of promoters' holding, for example from ESOPs
The book adds: every management talks up the benefits to minority shareholders, but its real intention is very hard to judge.
Delisting is the permanent removal of a company's shares from a stock exchange.
Because the company did not comply with regulations or the listing agreement.
The company chooses to go private: to escape reporting complexity, after a merger or acquisition, or for freedom to change strategy. Must follow SEBI's regulations.
Promoters invite bids and set a floor price
Each states the price at which they will sell
Accept, reject (cancel the delisting) or make a counter-offer
Promoter holding crosses 90%, and at least 25% of public shareholders took part
Swap means exchange. In a share swap, usually in a merger or acquisition, the acquirer pays with its own shares instead of cash. Each shareholder of the acquired company gets a pre-set number of the acquirer's shares. Both companies must be valued accurately first, so the swap ratio is fair.
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