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 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 Dividends & CAPD/ROC with their impacts on the market in detail.
DIVIDEND
Dividend is the part of the profit distributed by the company to its existing shareholders. Whenever the company earns a profit it distribute a part of profit to the shareholders. The distribution of dividend is fully depended on the decisions of companies Board of Directors. Any amount which is not distributed as a divided is being re-invested in the business.
A Capital Dividend is a mandatory event.
Dividend is calculated on the basis of companies face value.
i.e. Let's say Tata Motors has a face value ₹ 1 per shares and the company announced 500% of dividend per share. It means company announced a Cash dividend of ₹ 5 per share.
Dividend can be paid either Quarterly, Half Yearly or Annually.
Note:- Dividend yield is the important point during the analysis of any stock if we want a stock which provide us an regular income in form of Dividends.
Market Impact
Whenever a company Announced dividend in the market on the Ex date Market price of the stock gets adjusted by the amount dividend is announced. Considering above example market price of Tata motors on it's Ex date will get adjusted by 5 ₹. It happens because the amount distributed in the form of divided to the shareholders is adjusted from the books of the company.
ROC/CAPD
ROC (Return of Capital) also known as Capital distribution in the market. As the name suggests in ROC or CAPD capital has been distributed or return back to the share holders.
A Capital Distribution is a mandatory event.
This is a reduction in the capital (par) value of an equity, thereby reducing the position holder's ownership in the company. The capital reduction is paid by the issuer to the position holder, and the original security is exchanged for securities appropriate to the new capital value, on a one for one basis. The quantity of the position holders positions does not changed, whilst the capital value of the positions holder's equity does change.
For Example:-
A position holder may hold 100,000 ₹ 1 ordinary fully paid shares, which represents a capital value of ₹ 100,000. A capital repayment by the issuer of ₹ 0.20 per share will reduce the capital value of each share to Rs0.80. The position holder will now hold 100,000 ₹0.80 fully paid ordinary shares. The total number of shares held has not changed, but the capital value of the equity is now ₹80,000and the position holder will receive ₹ 20,000 in cash.
Author ~ Himanshu Rane (PGDM in Finance)
Security Specialist - Asset Servicing & Wealth Management (Union Bank of Switzerland)
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