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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 called Mandatory Event.
There are various types of Mandatory events some of them are:
- Bonus Share
- Stock Split
- Reverse Stock Split
- Dividends
- CAPD/ ROC
- Exchange Mandatory
- Mandatory Conversions
- Merger
- Demerger/ Spinoff
- Name Change
In this article, we will cover Reverse Split Also known as Consolidation & Scheme of Arrangements with their impacts on the market in detail.
Reverse Stock Split
A consolidation or Reverse Stock split is a process of decrease in an issuer's number of Issued shares proportional to the increase in the capital Value of the existing share.
As a result, at the time of the consolidation, neither the capital value of the shareholder equity nor the overall market value of the shareholder position changed. However, the market price per share will often rise in line with the par value adjustment.
A consolidation is a Mandatory event.
Example:
A position holder may have a Tata Motors position of 100,000 ₹1.00 ordinary shares, which represents a capital value of equity in the issuer of ₹ 100,000. The issuer announces a one for two consolidation with every two ₹1.00 ordinary shares being replaced by one ₹2.00 ordinary share. As a result of the consolidation, the holder’s holding will be 50,000 ₹2.00 ordinary shares. The quantity of shares held has decreased to 50,000, while the capital value of equity remains unchanged as ₹ 100,000.
Scheme of Arrangements
An event where the issuer provides combinations of securities and/or cash to position holders in return for the existing underlying security is known to as a "scheme of arrangement."
Similar to a share split or consolidation, the goal is to restructuring the issuer's issued capital.
Typically the event will be mandatory, but may be mandatory with options where the issuer
offers position holders a choice as to the form of distribution to be received, e.g. a choice of
securities or cash.
Author ~ Himanshu Rane (PGDM in Finance)
Security Specialist - Asset Servicing & Wealth Management (UBS)
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