A NOTE ON CORPORATE ACTIONS

What is a Corporate Action?

• Corporate actions are actions taken by a Company that impact the Shareholders value directly. It is an event that brings material change to a Company and affects its stakeholders. • Some corporate actions may have a direct financial impact on the shareholders (e.g. dividend), some may have indirect impact (e.g. stock split) and some have no direct financial impact (e.g. name change) • Corporate actions are typically agreed upon by a Company’s Board of Directors and authorized by the shareholders.

What are the types Corporate Actions?

Corporate actions are classified as mandatory, voluntary and mandatory-with-choice.

• Mandatory Corporate Action: A mandatory corporate action is an event initiated by the Board of Directors that affects all shareholders. Examples of this are: o cash dividend, o stock splits, o mergers & acquisitions, o bonus issue, o spinoffs, o bankruptcy,

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o class action, o de-merger/scheme of arrangement, o IPO, o liquidation, and o name change, etc.

• Voluntary Corporate Action: A voluntary corporate action is an action where the shareholders participate in the action. A response is required for the Company to process the action. o An example of a voluntary corporate action is a ‘Tender Offer’. The Company may request shareholders to tender their shares at a pre- determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the company's agents, and the company sends the proceeds of the action to the shareholders who participate. • Other examples of voluntary corporate actions are: o rights issue, o buyback, o delisting the company from the stock exchanges, etc.

• Mandatory-with-Choice Corporate Action: This corporate action is a mandatory corporate action where shareholders are given a chance to choose among several options. Shareholders may or may not submit their response. o cash or stock dividend option with one of the options as default.

Reasons for Companies to use Corporate Actions

• Return of profits to shareholders: Cash Dividends is the example where a public company declares a dividend to be paid on each outstanding share.

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• Influence the share price: Buyback is the example influencing the share price where a company buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price. • Corporate Restructuring: Corporate re-structuring is done in order to increase the profitability of the company. Merger is the example where two companies that are competitive or complementary come together to increase profitability.

Notice of Corporate Actions

Corporate actions are communicated to the shareholders by the Company. However, if you are not a shareholder, the corporate action details can be accessed from the NSE and BSE.

Conclusion:

Corporate actions are events initiated by companies that directly or indirectly effects their investors or bondholders. It is important that the investor/ bondholder has a clear picture of what a corporate action indicates about a company’s financial affairs and how that action influences the company’s valuation and prospects. This, in turn, helps investors in making informed investment decisions regarding the company.

Disclaimer

This report is proprietary and may not be reproduced in any manner without the written permission of InGovern Research Services Pvt. Ltd. (“InGovern”). While we have taken due care and caution in the compilation and presentation of the information and data in this report, no warranty is made as to the completeness, accuracy or utility of this analysis.

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