What are Corporate Actions?

If you scroll through your social media feed regularly, you might have observed so many upcoming movie releases or song release events. You might even come across a few articles or interviews of the actors from the movie, sharing some funny or serious incident that happened during the shoot. All these actions help them create a buzz around their movie and attract more people to watch it. This has an impact on its performance at the box office making it a blockbuster.
Similarly, coming to the stock market, publicly listed companies undertake some actions or events. These actions/events have a significant impact on the company and its shareholders. Such actions of a company are called Corporate Actions. So, let’s unfold this concept as you read ahead.

What are Corporate Actions?

Corporate actions are any actions taken by a company that has a material impact on the company and its shareholders. Now, what does material impact mean? Material impact means something which has a significant or direct impact on the company’s assets or financial position or share price. Hence, a company needs to inform shareholders/investors and the market about such actions so that they can make an informed investment decision. These actions may be financial or non-financial. For instance, declaring a dividend or changing the company’s name.

Who takes these decisions?

The board of directors of the company is responsible for the management of the company. BOD is a panel of people elected to represent the shareholders like you and me. They are the people who are closely working with the company and are therefore well informed and equipped to make decisions regarding such actions. These decisions are made at a consensus among the board. Some corporate actions might involve taking votes from the shareholders like you and me as well.

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Why are Corporate Actions undertaken?

1. Share profits with the shareholders:

Companies may choose to reward their shareholders by sharing their profits with them. By doing this, they boost their investors’ and the markets’ confidence in the company. Dividends are a classic example of this. Bajaj Auto, GAIL, Hindustan Zinc are some of the top dividend-paying companies in India.

2. Corporate restructuring:

Corporate restructuring involves modifying the existing capital or operational structure of a company. This is done to boost the future growth and profitability of the company. Some of the examples include mergers & acquisitions, demerger, spinoff, etc. In 2018, Vodafone India and Idea Cellular completed their merger to become the country’s largest telecom company with 408 million active subscribers and a revenue market share of 32.2%, according to ET.

3. Influence the share price:

Share price impacts the liquidity of the stock. If the stock is expensive, it is less affordable for many investors whereas if it is cheap or a penny stock then it becomes a highly questionable option. Hence, companies use corporate actions like stock splits, reverse stock splits, bonuses, buybacks, etc. to influence the share price. Alkyl Amines, Prime Fresh, Aarti Drugs are some of the recent examples of stock splits, bonuses, and buyback respectively.

What are the types of Corporate actions?

Corporate actions are classified into 2 categories as follows:

1. Voluntary

Let’s continue with our movie example. When a movie is released, it is our wish whether we want to watch it or not. In the same manner, voluntary corporate action allows you to choose whether to participate in the action or not. You must respond with your decision to process the action. Only participating shareholders will be affected by this corporate action. Some of the examples include rights issues, buyback, etc.

Rights Issue:
In this corporate action, the existing shareholders are given an option to subscribe to additional shares of the company at a discount. Here, the company tries to raise additional funds for their business.

In this corporate action, the promoters of the company buy the shares of their own company from the existing shareholders at an attractive price. This usually conveys increasing promoters’ confidence in the company.

2. Mandatory

Continuing with the same example, if you decide to watch a movie in a theatre it is obvious that you need to buy a ticket. So that is mandatory for you. Similarly, a mandatory corporate action involves the mandatory participation of a company's shareholders. It is when a company’s decision affects all the existing shareholders of the company. The shareholders of the company have little or no say in this decision. Hence, it is “mandatory” for them to accept it. Some of the examples include stock split, bonus, cash dividend, etc.

Stock split: In this corporate action, the existing shares of the company are divided into the ratio declared by the company. The split impacts the face value of the share.

Bonus: In this corporate action, additional shares are given by the company to its existing shareholders for free. I have discussed bonus shares in detail on my YouTube channel. You can check it out below.

Dividend: In this corporate action, a cash dividend is issued to the existing shareholders as a reward.

Where can you find the Corporate actions data?

It’s absolutely easy! You can access this data on NSE or BSE’s website. Just click on the links given and you can fetch the data related to a company/ for a specific action/ date, etc. You can also check it on Economic Times or moneycontrol.com.


Bottom line:

Corporate actions can tell us a lot about a company’s financial health which is why investors should understand them properly to make better and informed investment decisions. These actions also have an impact on the share prices. If you want to understand this impact in detail, I have covered it in the most simplified manner in my course on “Basics of Stock Market.” Click on the link to know more. Until next time!


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