In the world of investing and stock markets, companies often take important decisions that directly affect their shareholders. These decisions, known as corporate actions, can include anything from issuing dividends to stock splits or buy back. Understanding corporate actions is essential for investors, as they can impact the value of investments and future returns. In this blog, we will explore what corporate actions are, key dates like the record date and ex-date, and explain each type of corporate action with simple examples.
What are Corporate Action
Corporate actions refer to significant decisions or events initiated by a company’s management or board of directors that impact its shareholders and business structure. These actions may include dividends, stock splits, rights issues, mergers, acquisitions, and share buybacks. The primary aim of corporate actions is to help companies adapt to market conditions, raise capital, reward shareholders, or restructure the organization for better performance. They also ensure transparency by keeping shareholders informed and involved in key decisions.
The process begins with the board of directors making strategic decisions based on financial performance, future goals, and shareholder interests. Once finalized, the action is officially announced through press releases or regulatory filings. In some cases, shareholder approval is required before proceeding. After approval, the corporate action is implemented while ensuring full compliance with legal and regulatory standards. Clear communication between the company, shareholders, and regulators is essential throughout the process to maintain trust and transparency.
Record Date
In the context of corporate actions such as dividend declarations, the record date is the official date set by the company’s board of directors to determine which shareholders are eligible to receive the benefit. Whether it’s a dividend payout, bonus issue, or rights offering, the company creates a list of shareholders who are eligible based on who holds the shares on the record date. This date is crucial because only those whose names appear on the company’s books by the close of this date will receive the announced benefits.
Ex Date
The ex-date is closely related to the record date and is a key part of corporate actions. It is usually set one or two business days before the record date. On this date, the stock starts trading without the value of the upcoming corporate benefit. To be eligible for the benefit, an investor must purchase the shares before the ex-date. If the shares are bought on or after the ex-date, the buyer will not receive the corporate benefit—the seller will. This date ensures clarity on who is entitled to receive the declared corporate action.
Common Types of Corporate Actions
Corporate actions are important events carried out by a company that directly affect its shareholders and the value of its shares. These actions are used by companies to share profits, raise funds, reorganize their structure, or inform shareholders about key developments. Below are some of the most common types of corporate actions:
Dividend
A cash dividend is a payment made by a company to its shareholders out of profits. It’s a common way for companies to reward investors, usually paid quarterly, semi-annually, or annually. Dividends are declared as a percentage of the face value of a share. For example, if the face value is ₹10 and a 50% dividend is declared, you receive ₹5 per share. The amount is directly credited into investors’ bank accounts, offering a simple way to earn passive income.
Companies pay dividends to build investor confidence, show financial stability, and attract long-term shareholders. Dividends can also be paid even in loss-making periods if a company has strong cash reserves. However, dividend payment is not mandatory. Importantly, only investors holding shares before the ex-dividend date are eligible. On this date, the stock price typically drops by the dividend amount as the entitlement is removed.
There are three types of Cash Dividends:
- Special Dividend – One-time payout from extra profits.
- Interim Dividend – Paid before the financial year ends.
- Final Dividend – Paid after annual results.
Example:
If you own 100 shares and a ₹5 dividend is declared, you get ₹500. If the face value is ₹10, that’s a 50% dividend. To receive it, you must hold the stock before the ex-dividend date.
Bonus Shares
Bonus shares are additional shares given by a company to its existing shareholders for free, in proportion to the number of shares they already own. For example, in a 1:1 bonus issue, a shareholder receives 1 extra share for every 1 share held. Bonus shares are issued from the company’s accumulated profits and are not purchased by the investor. While the number of shares increases, the overall value of the investment remains the same initially.
Companies declare bonus shares to reward shareholders when they have earned good profits but want to retain cash for future business growth. By issuing bonus shares, the company can make the stock more affordable as the share price gets adjusted downward, increasing liquidity in the market. It also reflects the company’s strong financial position and confidence in its future performance, encouraging long-term investment.
For example, suppose you own 100 shares of a company, and it announces a 1:1 bonus issue. You will receive 100 extra shares (100 × 1 = 100), making your total holding 200 shares. If the original share price was ₹90, after the bonus issue, the price may adjust to ₹45 (90 × 100 ÷ 200), so the total value of your investment remains ₹9,000. This way, you hold more shares, but the value is adjusted to reflect the increased quantity.
Share Split
A share split is when a company divides each of its existing shares into multiple shares to reduce the market price per share. For example, in a 1:10 split, every 1 share becomes 10 shares. This means if you held 10 shares before the split, you will hold 100 shares after the split.
Even though the number of shares increases, the total value of your investment stays the same because the share price adjusts accordingly. If a share was priced at ₹1,000 before the 1:10 split, it would be priced at ₹100 after the split.
The face value of a share also changes during a share split. Face value is the nominal or original value of the share, used in the company’s accounting. In a 1:10 split, the face value is reduced in the same proportion. For example, if the face value was ₹10 before the split, it becomes ₹1 after. This adjustment ensures that the company’s total share capital remains unchanged, even though the number of shares has increased.
Companies split their shares mainly to make their stock more affordable for small retail investors. When the price of a share becomes very high, it may discourage new or small investors from buying it. By splitting the shares and lowering the price per share, companies increase liquidity and trading volume in the market. It also signals confidence in the company’s growth, which can boost investor interest.
For example, suppose you own 10 shares of a company, each priced at ₹1,000, and the company announces a 1:10 share split. After the split, you will have 100 shares priced at ₹100 each. Your total investment value remains ₹10,000 (100 × ₹100). The face value of each share will also reduce—say from ₹10 to ₹1—reflecting the new structure. This makes the stock more accessible to other investors without affecting your overall holding value.
Buyback
A buyback (also known as a share repurchase) is when a company buys its own shares from the existing shareholders, reducing the number of shares available in the open market. These shares are usually cancelled or held as treasury stock. As a result, the ownership percentage of remaining shareholders increases, and often, the earnings per share (EPS) and market price of the shares also improve. Buybacks are typically seen as a positive sign, reflecting the company’s strong financial position and confidence in its future performance.
Companies carry out buybacks for several reasons. A key reason is when they believe their shares are undervalued in the market, so buying them back can help increase the price. It’s also a way to return excess cash to shareholders, especially when the company doesn’t have immediate plans for expansion or investment. Additionally, reducing the number of shares in circulation increases EPS, which may attract more investors. For long-term investors, buybacks are often more tax-efficient than dividends and can lead to better value over time.
There are two types of buybacks
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Open Market Buyback:
In this method, the company repurchases its shares directly from the stock market over a period at the prevailing market price. For example, if a company decides to buy back 5 lakh shares over 6 months, and you as a retail investor sell your shares in the open market, the company may purchase them as part of its buyback. The price is not fixed, and investors can choose whether to sell or hold.
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Tender Offer Buyback:
Here, the company announces a fixed price—usually higher than the current market price—and invites shareholders to tender their shares. For example, if the market price of a share is ₹180 and the company offers ₹200 per share in a tender buyback, you may choose to sell your shares at this higher rate. There’s often a reservation for retail investors, improving the chances of their shares being accepted in the buyback.
Right Issue
A right issue is a way for a company to raise additional money by offering its existing shareholders the opportunity to buy more shares, usually at a discounted price. These shares are offered in a specific ratio based on how many shares you already own. For example, if a company announces a 1:4 rights issue, it means you can buy 1 extra share for every 4 shares you currently hold.
Companies usually go for a right issue when they need funds for purposes like business expansion, reducing debt, or improving their financial condition. This method is quick and cost-effective, and it allows existing shareholders to maintain their ownership in the company. Since the offer is at a discount, it also benefits loyal shareholders and gives them a chance to invest more at a lower price.
Retail investors can easily participate in a rights issue using their Demat account. Once the company announces the issue, eligible shareholders receive something called a Rights Entitlement (RE). You can either use the RE to apply for additional shares or sell it in the stock market if you don’t wish to invest more. The payment is made online through net banking or ASBA (Application Supported by Blocked Amount) during the application period.
Example:
Suppose you own 100 shares of a company, and it announces a 1:4 rights issue at ₹50 per share, while the current market price is ₹70. You will be eligible to buy 25 more shares (100 ÷ 4 = 25) at ₹50 each. So, by paying ₹1,250 (25 × ₹50), you increase your holding in the company at a discounted price, which can lead to better returns in the future if the company does well.
Conclusion
Corporate actions play a vital role in shaping a company’s relationship with its shareholders. Whether it’s receiving dividends, participating in rights issues, or understanding the impact of a stock split or buyback, being aware of these events helps investors make informed decisions. By keeping an eye on key dates like the record date and ex-dividend date, shareholders can better plan their investment strategies. In short, a clear understanding of corporate actions not only protects your interests but also helps you take full advantage of the opportunities they offer.