Recently, we have come across HDFC Bank & HDFC Ltd. merger, Jio Financial Services listing, TCS Buyback etc. Now, after looking at all these events, we might encounter a question why is it done?
So, to understand the reasons and implications of these events, let us understand what Corporate Actions are.
Corporate actions could be termed as an action taken by a company generally enacted by its board of directors that has a material impact on the company and its shareholders. It involves either changing a company’s name/brand, mergers, acquisitions, spinoffs, or issuing dividends.
There are different corporate actions that an entity can choose to initiate. Corporate actions include-
· Stock splits,
· Reverse Stock Split,
· Mergers and Acquisitions
· Right issues
· Bonus Issue
· Share Buy-Back
So, these actions are events that have the potential to significantly influence a company’s stock prices & hence a good understanding of these corporate actions gives us a clear picture of the company’s financial health. Let us understand them one by one:-
1) Stock Splits
As the name suggests, the company splits stocks to increase the number of shares in a company. A stock split involves the division of existing shares which causes a decrease in the market price of individual shares, but does not change the total market capitalization of the company. So, it is like converting one note of INR 100 into 10 notes of INR 10 each, value of 1 note decreases but the collective value remains the same.
2) Reverse Stock Split
A reverse Stock Split is like grouping a bunch of your existing shares into a smaller number. For example, if you had 10 shares and there is a 1-for-2 reverse stock split, it means you end up with 5 shares, but each would be worth double the original value. It is a way for companies to increase their stock price, but it does not change the overall value of your investment. Generally, penny stocks have a risk of delisting from the exchange, to prevent delisting, a company uses reverse stock split as a tool to increase its share price.
Dividends are the distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it may pay a portion of the profit as a dividend to shareholders. This distribution of profits can take place during the year namely, the Interim Dividend or after the year end called the Final Dividend. Dividends serve as a fixed income stream for investors, offering a consistent financial return.
4) Mergers & Acquisitions
These are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
5) Right Issues
Companies may offer existing shareholders to buy additional shares at a lower or discounted price to raise additional capital. This process may allow the company to raise money without necessarily incurring underwriting fees, although some rights issuances may be underwritten if the company wants to ensure the amount of capital raised.
6) Bonus Issue
A bonus issue, also known as a scrip dividend, is when a company issues additional shares to existing shareholders at no extra cost. Companies issue bonus shares to encourage retail participation and increase their equity base. When the price per share of a company is high, it becomes difficult for new investors to buy shares of that company. An increase in the number of shares reduces the price per share.
A spin-off is where a company creates an independent entity by separating one of its divisions or subsidiaries. Existing shareholders of the parent company are then given shares in the newly formed company. A spinoff is conducted so that it can focus its resources and better manage the areas of the business that have greater long-term potential. Businesses wishing to streamline their operations often spin off less productive or unrelated subsidiary businesses.
8) Share Buyback
In a share buyback, a company repurchases its shares from the market. It is as if the company believes its shares, are a good deal. By reducing the number of shares available, each remaining share might become more valuable. It is a way for a company to invest in itself and show confidence in its future.
Delisting is like taking a product off-the-shelf store. It means removing a company’s shares from a stock exchange. This could happen for various reasons, like if a company goes private, merges with another company or does not meet certain listing requirements.
What is the benefit of understanding Corporate Actions?
1. Understanding corporate actions can provide valuable insights into how a company might perform in the coming period.
2. Awareness of corporate actions reduces the risk of surprises.
3. Knowing about corporate actions helps us to make smarter investment decisions.
In conclusion, the dynamics of corporate actions play a pivotal role in shaping the financial landscape. From stock split to delisting, each event will be explained in detail in the upcoming blogs. So stay tuned…and…
Till then if you want to understand and learn more about such topics, make sure to check out my course on Fundamental Analysis.
Take Care, Jai Hind, and Bye bye!