What are Corporate Actions?
Corporate Actions implies action at the corporate level which has a significant impact on the stakeholders and the financial structure of the company. It is an event initiated by a public company that affects the securities (equity or debt) issued by the company.
Corporate actions are typically agreed upon by the company's board of directors and are authorized by its shareholders. It is undertaken mainly for either of the below mentioned reasons.
- Return profit to shareholders
- Influence the share price i.e., by enhancing liquidity of the stock in the secondary markets.
- Corporate Restructuring
Some of the popular examples of corporate actions include Right Issues, Bonus Issues, Dividends, Stock Splits, Mergers and Acquisitions (M&A) and Spin-Offs.
Corporate Actions can be broadly divided into two categories.
Let us understand the difference between them.
Mandatory Corporate Action
It is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. Practically speaking, the shareholder is a passive beneficiary of these actions. Examples of such corporate actions are: Dividends, Stock Splits, Mergers, Bonus and Spin-Offs.
Voluntary Corporate Action
A voluntary corporate action is an action where the shareholders elect to participate in the action. The shareholder must submit his response to the company expressing his/her desire to be involved. Examples of such corporate actions are: Rights Issues, Buybacks, Early redemption of bonds issues, etc.
Note: There is another type of corporate action that is "Mandatory with choice," where shareholders are offered a choice to choose from. Shareholders may or may not submit their elections. If a shareholder does not submit an election, the default option will apply. An example of such corporate action includes cash/stock dividends, with the former being the default choice.
Actions such as the announcement of a dividend, bonus, rights issue and a buy back are viewed positively from the viewpoint of the shareholder. These are ways by which a company rewards its existing shareholders. On the other hand, a stock split done to increase liquidity and improve participation in a stock is viewed positively because as the price reduces, more and more shareholders are attracted and thus liquidity increases.
Corporate actions can be easily viewed on the website of the company or the corporate filings section of the NSE/BSE website. You can also find the same in the StockEdge app under the Daily updates section. Click here to view the upcoming corporate actions of various companies.
So, we have learned about Corporate actions and also their types. But what is the purpose of corporate actions? Let us discuss this in the next unit.