Understanding Corporate Actions

Corporate Action can be termed as events that are initiated by the company's board of directors, shareholders, or creditors. It should have material impact on capital structure of a company and shareholders portfolio such as dividend distribution, bonus issue, stock split, merger, bond redemption, right issues, etc.

Three types of Corporate Actions:

Mandatory Corporate Action: These are actions decided by the company that affect all shareholders without any choice. Shareholders are simply notified of the action.

Dividend distribution: A dividend distribution is when a company shares a portion of its profits with its shareholders. It's essentially a payout from the company's earnings to the shareholders as a reward for their investment. It can be in the form of cash or stock.

Bonus issues: Company's gives additional shares to existing shareholders for free of cost to improve liquidity of the shares in the market.

Stock split: Company's stocks are divided into prescribed ratio, meaning face value will be divided to improve liquidity of the stock in the market when stocks are trading at high price. This makes the stock more affordable and potentially more attractive to new investors.

Mandatory with choice Coporate Action: In these actions, the shareholders don't have any choice. However, they can choose the way in which they want to get benefited.

Dividend with election: When the companies announce the dividend distribution, the shareholders can choose the way in which they want to get benefited. They can elect for dividend of cash or stock.

Merger with election: when 2 companies merge and form new company to reduce competition, business diversification and increase market shares. The shareholders can surrender the current company shares and take new shares or else they can elect the second option by surrendering the current company shares and taking back the capital.

Spin-off with election: A spin-off occurs when a parent company creates a new, independent company from an existing business unit or subsidiary. To focus on its core business and growth strategies independently or else sometimes the combined value of two separate entities can be greater than the value of the whole company. Here the shareholders can go for the option either to retain parent company shares or surrender the parent company shares and take new shares.

Voluntary Corporate Action: Under this action, shareholders can make a choice whether to participate or not in this action. Company reaches out to existing shareholders and offer them an option to buy additional shares at a discounted price compared to current market price.  Shareholders can choose to exercise their rights, sell their rights to other investors, or allow their rights to expire.

Right issues: The company reaches out to existing shareholders and offer them am option to buy additional shares at a discounted price compared to current market price to raise additional capital. Here, shareholders can choose to exercise their rights, sell their rights to other investors, or allow their rights to expire.

Buy back: Company offers to buy back the shares from the existing shareholders at premium price. The shareholder has option either to exercise it or not.