Chapter 17: Corporate Action Purpose and Participation Method

Well, let’s get directly to the point - how can one take part in upcoming corporate action?

Simple!

Visit the stock exchange or your stock broker’s website to understand the various corporate actions taken by the companies you've invested in.

On mandatory corporate actions, you won't need to make a decision. However, look to your stockbroker to help you navigate the voluntary corporate actions process. 

To participate in voluntary corporate actions on investments, your broker will process your response, according to your directions, in your trading account.

So, what would you need to consider before participating in a voluntary corporate action?

Participating in a voluntary corporate action

You can choose to decide whether you wish to participate or not. That's because your investment needs may be different.

So, before you choose to partake in a voluntary event, consider your financial objectives, future growth prospects and investment time horizons. It can be a good idea to consult with your investment advisors for additional advice and guidance.

To aid you make the right decision, you may need to look into:

• Market price vs offer price. Look into the current market price to compare what you can trade your stock for on the open market and what you're being offered.
• Impact on stock price. Research well to know if the corporate action would affect the stock price in the future positively.
• Influence on long term growth. Analyze if the corporate action would result in the growth of the company and an increase in share prices in the long term.

Now that you know the corporate benefits you could be entitled to as a registered shareholder of the company, the next point to remember is that you should be a shareholder on a specific date to benefit from corporate actions.

And this brings us to understanding the next two points: record dates, ex-dates and book closure.

Record dates and ex-dates

Let's say, Prakash Lights Ltd announces, bonus issue. Prakash Lights Ltd mentions that the investors who are shareholders on a particular date, known as the record date, are the only ones who can get the benefits of the bonus issue. Companies also provide a cut-off date to respond or take action.

It is applicable for all corporate benefits like dividends, bonus issues, stock splits, etc.

Let's define the chronology of the events:

Declaration date –

It is the date on which the corporate benefit is announced in the public post-approval in the company's Annual General Meeting (AGM).

Ex-date – It is like the cut-off date to get the benefit. You should be a shareholder or purchased the share before this date to be eligible for the announced benefit. Before this date, the stock remains cum- dividend, cum-bonus as the case may be, indicating that benefit is due on this stock.

Record Date –It’s the date used to determine the shareholder's eligibility to get the benefit.  It is typically one or two days after the ex-date. In India, the settlement cycle is T+2, so if a person buys the stock before the Ex-date, their name will be recorded in the shareholder list on the record date. The period in which the company does not handle any share transfer requests from the shareholders is known as book closure. 

But what’s the general purpose of these corporate actions?

Purpose of the corporate actions

Corporate actions are important because they:

• Help to restructure the organization. Some corporate actions are specifically taken to enhance the profitability of the company. These could include mergers, a voluntary fusion of two companies and acquisitions, which is the takeover and integration of another company, and spinoffs wherein a company splits off a section to create a separate business.
• Impact its share price. If the stock price is extremely high or low, it's liquidity can be widely impacted. If the stock price goes to high, investors may question its affordability. At the same time if the price is too low, investors may view it as a poor investment.
• Help to distribute profits to its shareholders. As a shareholder, you could receive dividend in the form of cash. If the company decides to issue a cash dividend, it will pay the dividend on every outstanding share.

So, as a shareholder, how do corporate actions impact the value of the shares you own?

If you're looking to understand how any corporate action has impacted your value of ownership, you can do so in the following two ways:

• Kind of benefits: If you were to take the example of a bonus issue, you stand to benefit from receiving additional shares in proportion to your current holdings. That means this form of corporate action results in an increase in your securities.
• Restructuring: When a company takes a particular corporate action, it could reshape or restructure your underlying securities position. For instance, mergers and acquisitions could lead to a converting your existing securities to a share of a new holding company.  

Summary

• Before you choose to partake in a voluntary event, consider your financial objectives, growth prospects and investment time horizons.
• When defining eligibility criteria for cutoff dates, an ex-date is fixed, that is typically one day before the record date.
• Corporate actions are important because they help to restructure the organization, impact its share price or distribute profits to its shareholders.

Congratulations! You are now thorough and through with the basic course. To hone your skills further, move on to the Advanced Course and know how you can become an adept investor.

Disclaimer –

ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.