CORPORATE ACTIONS
In the previous blog of Vyolvepaisa, we discussed about Portfolio and risks, the reasons for creating a portfolio, what varieties of stocks do we keep on our portfolio, etc. so today we will discuss about Corporate Actions, its impact on the price of the stock in the market. So we will discuss many types of corporate actions in this blog.
So without wasting much of our time, let’s get started!
What do you think Corporate Actions are? A corporate action is basically an action that a company takes for the future of the company, or the Board of Directors takes these actions with the consent of the shareholders, for the well-being of the company.
The dividend is the first corporate action, you might have heard at times that a particular company is giving dividend, or a company gives more dividend, or a particular company failed to provide a dividend, so when it comes to long-term investment, the companies provide a good dividend, like Maruti Suzuki, Reliance, etc have done in the past. So what is Dividend?
The dividend is provided to the shareholders i.e., the people who hold the shares of a particular company. The dividend is actually the profits of the company that is distributed among the shareholders. Providing dividend to the shareholders is solely based upon the company means it’s not mandatory for a company to pay a dividend, it’s up to the will of the company. If the company is having liquid assets, i.e., cash, then the company will pay a dividend to gain the trust of the shareholders. Say a person has invested his money in a company, then this shows that the person trusts the company, so dividend acts in gaining that trust.
But this is not as such that all of a sudden company thinks of giving dividends, it involves a process, so when do they decide about that process of whether to give dividend or not? This is decided in the Annual General Meeting (AGM), where the directors of the company come together and decide whether they have to give dividend or not. So the day when the AGM is conducted and the directors approve to it that they are willing to give dividends to their shareholders this year, then that particular day is called Dividend Declaration Date.
Now the point is, the company will not be giving dividends to all the shareholders. So the performance of the shareholders is reviewed in order to make out their eligibility. The date on which the eligibility of the shareholders is checked is termed as Record Date, which is at least 30 days after the dividend declaration date.
Now, who are the shareholders who will be considered eligible? The shareholders who own the shares before ex-date or ex-dividend date are entitled to receive a dividend. The ex-dividend date is normally two days before the record date. Why two days? We already discussed in our previous blogs that it takes T+2 days to settle a transaction in India. So it is decided on the record date about which shareholders will be getting a dividend..
The day when shareholders get dividend is termed as Dividend Payout Date. Seems we brought out a lot of technical terms, but that’s alright, we should know all these.
Dividend is basically seen, if you know that a particular company is providing good dividends, in that case, irrespective of the rise in the price of shares, and the company is running at profits or even fewer profits, you are still on the safer side.
But not all the companies pay a dividend to shareholders. As far as I know, the CEO of Berkshire Hathaway, Warren Buffet, don’t believe in giving dividends to their shareholders. According to him, if you really have to repay the trust of the shareholders, then enhance your company by its performance. Search out the price of 1 share of Berkshire Hathaway, you would have a clear idea.
Now let’s get into another Corporate Action i.e. Bonus Issue. Like we discussed in Dividend that company after paying off their expenses, distributes the remaining money with the shareholders, so bonus issue can be said as Stock Dividend. Say if there are free shares then the company can give away these free shares to the shareholders in a proportion say, 1:2, 2:1. Assume that you have 10 shares of a company then you are going to get the double of it. Say if it’s 2:1 after the bonus issue, then you will get additional 2 shares for every 1 share and in case of 1:2, you will get additional 1 bonus shares for every 2 shares you hold. You will be getting extra, you will not be paying extra cost but one thing to keep in mind is that price will remain the same. Say you have 100rs invested in the shares, then even after bonus Issue it will be 100rs itself. Say you purchased 10 shares of a company and the price is still running at 100rs, then your total value will be 1000rs but after bonus issue say you got more 10 shares, so now you have 20, but the total value will be 1000rs only.
Let’s move ahead to the third corporate action, Stock Split. Make a guess what do you think, stock split would mean! Stock split simply means splitting of the number of shares held. Say the face value of a stock is 10Rs, then after a split of 1:2, the face value of the share will be 5Rs. The single share that you kept will now be considered as 2 shares. Little more complicated, right? But these Corporate Actions are made complicated by using different rules and techniques, and this the reason that the common people don’t feel like knowing them. Well, we as a human being are more fascinated by the complicacy of the things, though the more the things are complicated, the more we distance ourselves from it. That’s why we don’t like to know about finance, though we admire the finance world from the outside.
Say there is a teacher in a coaching centre, and they are teaching something in such a way that is a bit complicated, then our perception would be that the teacher might be very knowledgeable. This happens that we are easily inclined to things that we don’t understand easily. And there comes the fact that we completely ignore these Corporate Actions or even Finance, we don’t feel any urge to know these stuff, because our perception tells us that Finance is only for the Commerce students, nor does the commerce students take much interest.
But WE SHOULD KNOW what is happening to our money and why is it happening? When you are spending your whole life for the money you should know if your money is in the right hands.
Okay, so next Corporate Action is Right Issue, which was done recently by Reliance Jio. So what happened in Right Issue, Think it as a second IPO. We all know Initial Public Offering (IPO) when the company lists itself in the Stock Market. So Second IPO is a secondary offering of shares after an IPO, which is only for the existing shareholders. So why did Reliance Jio did right Issue? Because the company was in need of funds to repay back the debts. So Right issue brings extra shares and distributed the shares to the existing shareholders at a lower price. Say the share price of a company in the stock market is 100Rs. so in Right issue, it will be provided to you in 80Rs.
Moving towards the last and the important Corporate Action, Buy Back Of shares. As the word suggests, the owner is buying back the shares. The shares that are with the public or with the shareholders, the owner is buying back the shares with them. Owner Buybacks the shares when he is confident that the company is definitely going to perform well so he pays more price for it. The buyback also increases valuation. Say you are the owner of your company and you are purchasing back your shares by paying a little extra money for the same, then the valuation will definitely increase.
“I don’t like stock buybacks. I think if a company has the money to buy their stock back, then they should take that and increase the dividends. Send it back to the stockholder. Let them invest their money again from the dividends.” ~ T. Boone Pickens
So that’s all from Vyolve Paisa for today, stay tuned for the amazing upcoming Financial learnings and keep believing that we can Evolve with Vyolve.
You can also click on the link below to listen to our podcast if you want the episodes in the audio version.
Do checkout our Instagram page, for the amazing Financial Facts.
