Overview of corporate actions by a company listed on stock market


This article provides an overview of different corporate actions like a bonus, stock split, dividend or right issues. Each corporate actions affect the share price of a company. Read to know more about such corporate actions in detail.

Shares are traded on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The companies have to be listed on either one or both the stock exchange in order to trade. The company's share price depending on supply and demand, results of the company, any news related to the economy or world news. Corporate action also plays an important role also affect the share price.

What is corporate action?

Corporate actions are defined as events that change the company's securities like equity or debt. The Announcement of dividends, bonus shares, stock splits, rights, AGM or EGM, merger, etc. are called corporate actions. Any corporate actions are announced well before the event date and this date is called the announcement date. These corporate actions lead to a change in the price of a stock of that particular company.

We will discuss common corporate actions like dividend, bonus, stock split, right issues-

Dividend:

The dividend is a payment made by a company to its shareholders as a part of the profit in proportions to the number of shares held. This payment is either directly transferred to the shareholder's bank account or it can be given in the form of a dividend reinvestment plan by a company itself. Normally dividends are given on the face value of the share. If a company announced a dividend of 150 % that means the amount of Rs. 1.1 times the face value of the share. If it is 200 %, the dividend of 2 x face value will be given to the shareholder in their bank account. The dividend amount is tax-free. As a normal practice, the company declares the dividend every year. This dividend is called final dividend but if a company want to attract more investor or has made a good profit during a quarterly result, it can declare an interim dividend in addition to the final dividend.
Overview of corporate actions by a company listed on stock market

Stock split:

Whenever the stock price rises so much high that it is difficult for a small retail investor to buy it. In such a scenario, the company decides to split the stock into some proportion (like 2 for 1 or 3 for 1) so that final price is much less than initial price the split price and this enables the small investor to become a part of the stock buy and sell process for this company or in other words to increase the liquidity of the shares. During the stock split, the total market capitalization remains the same. If a company has issued 1 lacs shares of price Rs. 1000, its total market capitalization is a multiplication of a total number of shares and stock prices. Thus, in this example, market capitalization is Rs. 10 crores. Now, a small investor finds it difficult to buy a single share of Rs. 1000. In such a case, if a stock split of 1:1 occurs, the new stock price will be half i.e. Rs. 1000/2 = Rs. 500. This will reduce the market capitalization of Rs. 5 crores. Thus, to counter this effect, the number of shares now doubled. This makes the market capitalization of Rs. 10 crores. This Rs. 500 share is now cheaper compared to Rs. 1000 priced share. Thus, more people participate in trading and investment. Each shareholder will receive one extra share against each old share but at half face value and half share price.

Bonus shares:

The bonus share is also similar to the stock split but here bonus share is given against the existing shares of the company. if a company gives 1:2 bonus that means the company gives one extra share for every 2 shares held in the DMAT account. For example, Reliance Industries gave the bonus share 1:1 in 2017 and because of this reason, the share price becomes half of the existing. In this case, the face value of the stock also becomes half. No splitting occurs when a stock trades at a face value of Rs. 1. Any stock should have at least Rs. 1 face value. If a company provides bonus shares, it is a positive sign or good health of the company and its future growth.

Right issue:

When a company declares the right issues, it is actually providing additional shares against the existing shares. If the company issues 1:4 right issues, that means 1 additional share at a discounted price is given against 4 shares held in DMAT.

Important notes related to corporate actions

Announcement and effective date:

It is a date on which the very first announcement of the event is made. This date is well in advance before the ex-event date. Ex-event is termed as the ex-dividend date or ex-bonus date. For example, look at the image below: L&T has announced on the dividend of 900 % (Rs. 18 per share = 9 x Rs. 2 face value) 10-05-2019. Anyone who holds the share on effective date i.e. 24-07-2019, he or she will get the dividend of Rs. 18 per share held. In order to be eligible for a dividend or bonus or split, one has to have shares in DMAT on the effective date.

Price adjustment due to corporate actions

Because of corporate action, there will be an effect on the share price. The share price will fall to 50 % of the original value on an ex-bonus date if the bonus of 1:2 is declared.

Conclusion

Any company who is listed on NSE or BSE when announcement dividend, stock split, bonus or right issue, the price of the stock gets affected by this action. The main aim is to increase the liquidity of the stock and increase the interest of the common investor like a small retail investor.


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