Corporate Actions
A company takes various actions that are not related to business but have a major impact on investors. The actions may include distributing part of the earning to shareholders, issuing additional shares, partnering with another business entity, etc. All such actions are important from the perspective of investors and understanding them is really beneficial while taking decisions of staying invested in any company or not. Let us go through some major corporate actions.
Dividend
Let us say XYZ Ltd. made 100cr rupees profit last year. Now, what will it do with this 100cr rupees? There are a few options like it can invest that money in buying new machinery to increase production, acquire some smaller companies to either expand business in the newer region or reduce competition, keep cash for future expenses, or to distribute among shareholders.
The option of distributing profits among shareholders is called a dividend. The standard practice of most companies is to partially distribute dividends and keep the remaining cash for expansion.
Remember dividend payment depends on the company policy and there is no compulsion. E.g. Dmart (Avenue Supermart) has never paid any dividend to date (July 2020, can't predict future actions) as the company policy is to keep investing profits in starting new stores.
Rights Issue
When an already listed company requires money. It has few options to raise it. One of the options is a rights issue. The Rights issue is a private placement of shares where new shares are offered to existing shareholders of the company at a discount price. The rights issues are issued in a specific ratio to the number of shares held. e.g. Reliance recently came up with rights issue in the ratio of 1:15 at 1257 rs/share. That means an investor can apply for 1 share if he owns 15 shares and the share will be allotted at 1257 rs.
Bonus Issue
Bonus Issue is nothing but a dividend in the form of equity. Sometimes a bonus share is also called equity dividend. Bonus shares are issued to existing shareholders of the company without any consideration from them. Such issues are offered in a specified ratio to the existing holding of the investor. e.g. HCL tech had issued a bonus issue of 1:1 in December 2019. Which meant that every shareholder got 1 bonus share per share held by him.
Bonus issues do not add any financial impact on investor's portfolios but a major psychological impact is generally observed.
Stock Split
A stock split is a process of splitting existing shares of a company. If a stock split 1:10 is announced then each share of the company will be converted into 10 shares.
e.g. XYZ Ltd. company's 100 shares are listed at FV of 10rs and are trading at 100rs then after a split of 1:10 will cause the number of shares rising to (100*10=1000) shares, FV will drop to (10/10=1)rs, and the trading price will drop to(100/10=10)rs.
Stock splits do not add any financial impact on investor's portfolios but a major psychological impact is generally observed.
Share Consolidation
The share consolidation is the reverse of the stock split. In share consolidation companies shares are consolidated together in a specified ratio. If share consolidation of 10:1 is announced then 10 shares will be converted into 1 share.
e.g. XYZ Ltd. company's 100 shares are listed at FV of 10rs and are trading at 100rs then after a consolidation of 10:1 will cause the number of shares dropping to (100/10=10) shares, FV will rise to (10*10=100)rs, and the trading price will rise to(100*10=1000)rs.
Stock consolidations do not add any financial impact on investor's portfolios but a major psychological impact is generally observed.
Buyback
When a company have a lot of cash reserve and do not find good opportunities to invest that cash for expansion, the company may decide to use that for buying share back. Generally, buybacks are announced if the company feels the share price has fallen way lower than its intrinsic value. The investor community looks at buyback offers as a very positive sign as it shows management confidence in the business.
Buybacks are offered at a specified price which is normally higher than the market price of shares. Even if buybacks are great signals one should dig deeper while investing based on such an announcement, because the company may be announcing buyback just to manipulate the price of the stock and end up canceling buyback.
Delisting
Delisting is the process of permanently removing shares of the company from exchanges. Delisting can be compulsory or optional. Compulsory delisting is done because of non-compliance while voluntary delisting is the company's decision to go private. SEBI has defined regulations for delisting and all regulations have to be followed. Delisting of the company doesn't necessarily kick off all investors. If any investor chooses to remain invested he remains the partner in the company even after delisting.
These are a few important corporate actions, I hope you understood these actions if there is any query feel free to comment. If you want any other actions to be covered in this topic please comment below.
And don't forget to READ TO LEARN INVESTING.
Comments
Post a Comment
If you have any doubt please comment