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There are actions initiated by companies themselves that directly impact your holdings, while provoking stock price reactions. Wide-ranging ones, called corporate actions, encompass everything from a routine dividend to a corporate restructuring or an acquisition. Here's detailing the most common forms of corporate actions.
Dividends
These are among the most routine of corporate actions. Dividends are a part of the profits a company earns which are paid out to shareholders. Typically, dividends are quoted as a certain figure per share as well as a percentage of the face value of the share. For instance, Bajaj Auto paid Rs 40 a share valued at Rs 10 each or a 400 per cent dividend for FY-11.
Dividends may be paid out at the close of the financial year, called the final dividend, and during the year as well, called interim dividend.
Bonus issues
A company comes out with a bonus when it gives out a certain number of shares for no cost to its shareholders. The share capital of the company increases to the extent of the issue. The number of bonus shares that will be issued is announced as a ratio to the number of shares held. For instance, Zodiac Clothing Company announced a 1:2 bonus last year. This means shareholders would get one bonus equity share for every two shares held. As a shareholder, you will hold three equity shares instead of two post the offer. Companies opt for bonus issues as a method of rewarding shareholders. While utilising excess reserves to do the same, it also signals its faith in servicing a higher equity base. Dividends and bonus issues increase the returns on a shareholder's investment.
Stock splits
A stock split occurs when a company divides each share into two or more equal portions. Here, the total value of your investment remains the same. The price of the stock, and the earnings per share, reduces to the extent of the split.One reason companies undertake stock split is to improve the liquidity in a stock and encourage investments from smaller investors.
Rights and buy-back
Coming out with rights issues is another instance of a corporate action, adopted to raise capital and reward shareholders. Here, a company offers its existing shareholders fresh shares in the company at a specified cost and during a specified time period. Rights issues can be subscribed to only by existing shareholders. The number of shares on a rights basis is expressed as a ratio to the number of shares held. Usually, rights issues are priced at a discount to the prevailing stock price.
The next form of a corporate action is a buyback plan, where companies flush with reserves or cash decide to repurchase their stocks and reduce capital. Buybacks can be done in two ways. One is through a tender offer where a company offers to buy shares from the shareholders at a specified price. For such an exercise to actually be successful, the set buyback price should be at a premium to the prevailing market price. The other way is to simply purchase them in the open market.
Other examples of corporate actions include restructuring moves where units are hived off into new entities, or mergers and takeovers. For any action, companies mark a date as the record date. Those who are shareholders in the company's books on that date stand to benefit from the action.
Need any other investment-related help? Feel free to write in to us at >younginvestor@thehindu.co.in
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