What are Corporate Actions?

Understanding Company Moves: Your Guide to Corporate Actions

Ever feel lost when a company you're invested in announces a major change? Stock splits, mergers, rights issues – these terms can leave even seasoned investors scratching their heads. But fear not! This chapter will help you to understand these corporate actions and navigate them with confidence.

Corporate actions are decisions taken by a company's board of directors that lead to significant changes affecting the company's stakeholders, including shareholders. These actions are crucial as they can impact the company's stock value and its overall financial health.

Corporate actions include a wide range of activities, from distributing profits through dividends to structural changes like stock splits and mergers. Understanding these actions is essential for investors to navigate the financial landscape effectively. As we delve into corporate actions, you'll gain insights into how these strategic moves can influence your investments.

Types of Corporate Actions:

There are three main categories of corporate actions: mandatory, voluntary, and mandatory with options.

• Mandatory Corporate Actions

These actions affect all shareholders and do not require any action from the shareholders themselves.

Examples include stock splits, dividends, and mergers.

1) Stock Splits: A stock split increases the number of shares outstanding by issuing more shares to current shareholders. Imagine a stock split as increasing the number of shares you own without changing the total value of your investment.

For example, if a company announces a 2-for-1 stock split, each shareholder will receive an additional share for every share they own, and the stock price will be halved. An example is the stock split of ITC Ltd. in 2016, where the company split its shares in a 1:2 ratio.

2) Dividends: Dividends are a portion of a company's earnings distributed to shareholders. They can be in the form of cash or additional shares (stock dividends). For instance, Tata Consultancy Services (TCS) regularly pays dividends to its shareholders, showcasing its strong financial health and rewarding investors. We will study dividend in detail in the next chapter.

3) Mergers and Acquisitions: These involve the consolidation of companies or assets. For example, in 2018, the merger of Vodafone India and Idea Cellular created Vodafone Idea Ltd., one of the largest telecom operators in India. This merger significantly impacted shareholders as it combined the strengths and market presence of both the companies.

• Voluntary Corporate Actions

Here, you get to make a choice whether to participate or not! An example is a tender offer, where shareholders can choose to sell their shares at a specified price.

1) Tender Offers: A company offers to buy back its shares from shareholders at a premium to the current market price. For example, Infosys announced a buyback of shares in 2021, giving shareholders the option to tender their shares at a premium price.

• Mandatory with Options

These actions require shareholders to make a choice. An example is a rights issue, where shareholders must decide whether to buy additional shares.

1) Rights Issues: A rights issue offers existing shareholders the right to purchase additional shares at a discount. For instance, in 2020, Reliance Industries Ltd. launched India’s largest rights issue, raising over INR 53,000 crores. Shareholders had to decide whether to buy additional shares at a discounted rate, which could potentially increase their holdings and benefit from future growth.

Why do Corporate Actions Matter?

Corporate actions are crucial because they can influence a company's stock price and investor sentiment. They are often signals of the company's growth, restructuring efforts, or financial health. Understanding these actions helps investors to make better-informed decisions. For instance, a consistent dividend payout by a company like TCS indicates stability and profitability, which can attract long-term investors.

Let's see these actions in practice with some prominent Indian companies:

• TCS: Their consistent dividend payouts showcase their financial strength and commitment to investors.
• ITC Ltd.: Their 2016 stock split made shares more accessible for smaller investors.
• Reliance Industries: Their rights issue allowed existing shareholders to buy additional shares at a discount, helping the company raise capital.

Impact on Shareholders

Corporate actions can significantly impact shareholders. They can provide additional income through dividends or opportunities to increase holdings through rights issues and stock splits. However, they can also lead to the dilution of shares or require shareholders to make decisions that affect their investment value.

• Income Generation:

Dividends provide shareholders with a steady income stream. For example, retirees who invest in high-dividend-paying stocks like ITC Ltd. can rely on this income to cover their expenses.

• Investment Opportunities:

Rights issues and stock splits create opportunities for shareholders to increase their investment in the company. For instance, shareholders of Reliance Industries Ltd. who participated in the rights issue, benefited from the subsequent increase in stock value.

• Decision Making:

Shareholders must be vigilant and make informed decisions during voluntary actions like tender offers or mandatory with options actions like rights issues. These decisions can significantly affect their investment portfolios.

Conclusion

By understanding corporate actions, you become a more informed investor, equipped to make better decisions for your portfolio. You can potentially benefit from these company moves and navigate the ever-changing investment landscape with confidence. Next, we will delve deeper into each corporate action, starting with dividends. We'll explore dividends, how they work, and why they are crucial for investors. Stay tuned as we uncover the intricacies of dividends and their role in a successful investment strategy.