Corporate actions
A corporate action is an event initiated by a company that will bring an actual change to the shares issued by the company. Examples of corporate actions include stock splits, dividends, bonuses, and buybacks, etc. These actions are decided by promoters or management.
Key terms:
- Promoter: He is the owner of the company. Promoters can be a group of people or a single person.
- Face value: It means the original price of one share when the company was initially founded. It is decided by the promoter (or promoters) of the company.
- Market value: Market value is the current price of the stock in the stock market. It changes over time.
Example: The face value of “Britannia” is Rs 1, and the market value of the same is Rs 4922 (at the time of writing).
Corporate actions:
1. Dividends
In simple words, a dividend is the reward given by a company to its shareholders. It is distributed from the company’s profits. But companies don’t distribute their entire profit as dividends but keep some portion as reserves and distribute the rest as dividends.
- It is not mandatory for the company to declare a dividend every year. If the company decides that instead of paying dividends to shareholders, they would be better off utilizing the same cash to fund a new project for a better future, they can do so.
- The dividend paid is expressed as a percentage of the face value and paid on a per-share basis.
Example: Recently, Britannia declared a 7350% dividend per share. The face value of Britannia is Rs 1, so the dividend is 73.50 per share (7350% of Rs 1).
2. Buyback of shares:
A buyback is a company’s way of investing in itself by buying shares from other investors in the market.
- When a company announces a buyback, it signals the company’s confidence in its financial strength.
- Buybacks reduce the number of outstanding shares in the market.
3. Stock split:
A stock split is an action in which a company divides the face value of its existing shares into a smaller face value; it simply increases the number of shares.
If the face value of one share is Rs 10, then it can be split into the following ways:
- 2 shares of face value Rs 5
- 5 shares of face value Rs 2
- 10 shares of face value Rs 1
Example, If a stock with a face value of Rs 10 undergoes a 1:1 split:
- It splits into two shares of Rs 5 each.
- If you own 10 shares before the split, you will have 20 shares after the split.
The share price of the stock also splits in the same ratio as the stock split. The above example should give you a better idea.
- Stock splits do not change the overall investment value but make shares more affordable for new investors.
4. Bonus shares:
Bonus shares are shares issued by the company to its existing shareholders. As the word ‘bonus’ implies, they are distributed free of cost to existing shareholders.
- These typically come in a fixed ratio, such as 1:1, 2:1, 3:1, etc.
- If the ratio is 2:1, the existing shareholders receive 2 additional shares for every 1 share they hold at no extra cost. When bonus shares are issued, the number of shares a shareholder holds will increase, but the overall value of the investment remains the same.
Again, consider the above stock split example.
- If you own 10 shares of a company and the company announces a 1:1 bonus,
- it means you receive 1 free share for every 1 share you hold.
- A bonus issue can be made instead of dividends if the company wants to retain cash while still rewarding shareholders.
When a company issues bonus shares, its share capital increases, and its reserve fund decreases.
Bonus vs. Stock Split
Many investors confuse stock splits and bonus shares since both increase the number of shares held and they have few similarities.
- A bonus issue increases the number of shares without changing the face value.
- A stock split increases the number of shares with a proportionate decrease in face value.
You can compare a stock split to splitting a pizza, you can split 4 pieces into 8, but the total quantity remains the same.
Why do companies issue bonus shares or stock splits?
Stock splits and bonuses are not mandatory, they depend on management’s decision. Companies issue bonus shares or stock splits to encourage retail participation by reducing the market value per share, especially when the company’s share price is high, making it difficult for new investors to buy shares. This increases demand and liquidity.
- A great example is, MRF Tyres has not had a stock split or bonus since 1975 and now it is trading at around Rs 1,13,000 per share.
- In 2020, Eicher Motors stock traded above Rs 21,000 per share. The company declared a stock split by dividing its face value from Rs 10 to Rs 1, making it trade at Rs 2100. So more affordable for retail investors. Now, it is trading around Rs 5000 per share.
Dividend/Bonus/Split Payment Process
The dividends, bonus, and split shares are not paid immediately after their announcement. The following timeline helps understand the dividend cycle:
- Announcement date: The date when the company announces the bonus, split, dividend, etc.
- Record date: The date by which investors must have shares in their DEMAT account to receive the bonus, split, or dividend.
- Ex-date: The ex-date is one day before the record date. If the record date is 15th May, then the ex-date is 14th May. Shares purchased on or after the ex-date will not be eligible for the bonus.
Corporate actions can be strategic moves by companies to attract retail investors, improve liquidity, and enhance shareholder value.
Summary
- Corporate actions impact share prices and shareholder value.
- Dividends reward investors with cash payouts.
- Buybacks reduce the number of shares and often increase share value.
- Stock splits make shares more affordable by reducing the face value.
- Bonus shares distribute additional shares to investors at no cost.
Understanding record dates and ex-dates is crucial for receiving benefits.
