“A corporate action is an event carried out by a company that materially impacts its stakeholders .”
A company initiates several actions, apart from those related to its business, that has direct implications for its stakeholders. These include sharing of surplus with the shareholders in the form of a dividend, changes in the capital structure through the further issue of shares, buybacks, mergers, and acquisitions and delisting, raising debt, and others. In a company that has made a public issue of shares, the interest of the minority investors has to be protected.
Concept of Corporate Action
Corporate benefits and actions apply to all investors who appear in the register of members, To determine this, the company announces a record date or book closure period, and investors whose names appear on the records on this date become eligible shareholders to receive notice of the relevant corporate action and benefit.
Some of them are mentioned below:
After the payment of taxes the profit remains for the shareholders, the company can do two things can retain it or distribute it among the shareholders in equal proportion, which is termed as the deceleration of dividend. A company can also declare an Interim Dividend within the year & a Final dividend by the end of the financial year. A company must distribute the dividend within 30 days after the deceleration.
It is an alternative to the cash dividend, also termed an Equity dividend. A company issues bonus shares to its existing shareholders. The entitlement to the bonus shares depends upon the existing shareholding of the investors.
A stock split is a corporate action where the face value of the existing shares is reduced in a defined ratio. Companies consider splitting their shares if prices of their shares in the secondary market are seen to be very high restricting the participation by investors. As the price per share comes down post-split, share split leads to greater liquidity in the market.
The share consolidation is the reverse of the stock split. In a share consolidation, the company changes the structure of its share capital by increasing the par value of its shares in a defined ratio and correspondingly reducing the number of shares outstanding to maintain the paid-up/subscribed capital.
Companies consider consolidating their shares if prices of their shares in the secondary market are seen to be very low affecting the perception of investors. An increase in the price per share post-consolidation leads to a better perception among the market participants about the company’s prospects.
Merger and Acquisition:
Mergers, acquisitions, and consolidations are corporate actions that result in a change in the ownership structure of the companies involved. In a merger, the acquirer buys up the shares of the target company and it is absorbed into the acquiring company and ceases to exist.
The assets and liabilities of the target company are taken over by the acquirer. In an acquisition or takeover, the acquiring company acquires all or a substantial portion of the stock of the target company. Both entities typically continue to exist after the acquisition. In a consolidation, companies combine to form a new company and the merged companies cease to exist.
Buy-Back of Shares:
Buy-back of shares can be done only out of the reserves and surplus available with the company. The shares bought back are extinguished by the company within a stipulated time frame and that leads to a reduction in its share capital.
To be eligible for a share buyback, a company should not have defaulted on its payment of interest or principal on debentures/fixed deposits/any other borrowings, the redemption of preference shares, or payment of the dividend declared.
Delisting of Shares:
Delisting of shares refers to the permanent removal of the shares of a company from being listed on a stock exchange. Delisting may be compulsory or voluntary. In a compulsory delisting, the shares are delisted on account of non-compliance to regulations and the clauses of the listing agreement by the company. In voluntary delisting, the company chooses to get the shares delisted and go private.