CORPORATE ACTION

When an Issuer of the securities wants to benefit its shareholders/position holders or wants to change the structure of the securities. Then such events are called Corporate Action Events.

Purpose of CA Events

Fund Raising
Restructuring of Securities.
Redemption of Debts.
Distribution of Income

Fund Raising:

Corporations require funds to finance their projects to expand their business or to pay back their existing Debts. There are two main sources to raise the funds one from Debt and another from the public. Funds raised through Debt require high interest to be paid meanwhile fund raised through the public does not require any interest to be paid, they get benefits in the form of income distribution that to not mandatory to be paid regularly it completely depends on the company management. Hence, Fundraising through the public is a cheap source of raising funds for corporates.

Restructuring of Securities:

Listed Organisations while operating in the business reached a point where they take decisions to restructure their existing securities in the market it can either be any of them like to increase outstanding shares in the market (Stock split), repurchase shares from the market (Buy Back), or to reduce the number of outstanding shares (Rev. Split) and they can also go for a decision to pay back the capital invested by their shareholders in the company through capital distribution all such events has an impact in the book which is beneficial for the company in long run. Each CA event has its own impact on the market & on the books of the company which we will cover in our upcoming blogs.

Redemption of Debts:

Typically, it can be defined as the procedure of repaying holders of debentures that a corporation has issued. In other terms, it refers to the process of paying back the principal to the holders of debentures. Given the size of the redemption requirement, it is a noteworthy transaction for the majority of corporations.

Distribution of Income:

Investors who invested in the corporation get benefited in the form of Dividends, it's a form of benefits provided against the amount they invested, the decision of distributing dividends is completely based on the management, and it is distributed from the earnings of the company.

Types of Corporate Action Events

There are basically five categories of CA events:

Voluntary.
Mandatory.
Mandatory With Options.
Multi-Stage
Issuer Notice.

Voluntary Events:

A Voluntary event is an event in which the existing Shareholders get an option to elect whether they want to participate in the event or not. It fully depends on the shareholder's decision. A tender offer is an example of a Voluntary event. Other examples are:

Examples:

Tender
Odd Lot Tender
Rights Issue
Warrants Exercise

Mandatory Events:

These are the events Initiated by the Board of Directors of the company that Impact all the Shareholders and participation in such events is Mandatory in Nature.

Examples:

Bonus Share
Dividends
Stock Split
Reverse Stock Split
Dividends
CAPD/ ROC
Exchange Mandatory
Mandatory Conversions
Merger
Demerger/ Spinoff
Name Change

Mandatory with Options Events:

These are also the events Initiated by the Board of Directors of the company that Impact all the Shareholder's participation in such events is also Mandatory but the only difference is that here the shareholders are given a chance to choose among several options.

Examples:

DRIP (Dividend Reinvestment Plan)
Currency Options
Cash or Stock Dividend Options

Multi-Stage

These corporate action events are events that take place in a combination of two or more CA events. One followed by another.

For eg...If Company A has a total equity share of Rs 20,00,000 with a face value of Rs 1 each. and the company wants to double its outstanding shares in the market along with a reduction of capital infused by the shareholders in the company to Rs 12,00,000. In such cases company goes for a Multi-stage corporate action event.

Solution: Company A will first go for a Stock split of 1:2 where every shareholder who holds 1 share of the company with an FV of Rs 1, will get 2 shares of Company A with an FV of Rs 0.50 each. This will double the number of outstanding shares in the market which the company wants to achieve as per the above example.

Now the company has a total of 40,00,000 outstanding shares in the market of Rs 0.50 each which results in a total market cap of Rs 20,00,000 now to achieve a reduction of capital infused by the shareholders in the company to Rs 12,00,000. The company will go for a (Captial Distribution/ROC) for Rs 0.20 per share. Then the FV will be reduced to Rs 0.30 per share which will reduce the total capital infusion by the shareholders in the company to Rs 12,00,000 which is (40,00,000*0.30 = 12,00,000).

Though, this company has achieved both the requirement of doubling the number of outstanding shares with the reduction of the total capital infusion by the shareholders in the company to Rs 12,00,000.

Issuer Notice

These type of Corporate Action events does not include any types of cash/Stock transaction in the event. As the name suggests it's just a Notice for the shareholders to get aware of the notification.

Examples:

AGM (Annual General Meeting)
EGM (Extra-Ordinary General Meeting)

Note:- In Our upcoming blogs, as mentioned above we will try to cover every type of corporate action event in Detail with their market impact & also try to cover those events which have a similar market impact but a different impact in the books of the company for more detail clarification.

Author ~ Himanshu Rane (PGDM in Finance)

Senior Financial Analyst - Asset Servicing & Corporate Actions

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