Impact Of Corporate Actions For Investing In Equities

A corporate action is an event initiated by a company that affects the value of the shares issued by it. From time to time, besides interim dividends and special dividends, corporates come out with various actions like rights issue, bonus issue, splitting face value of a share, buyback of shares, the demerger of shares, reverse merger, action aided by some policy framework, etc. These could often prove the icing on the cake on investment in equities! That is to say, by investing nothing or little, there could be immense benefits. Thus one should keep a keen eye on such developmental corporate actions, especially on the record date for any such action. Consequently, it is desirable to keenly note and take desirable action before the record date of the event. Let us understand such corporate actions and their benefits of investing, as a step towards wealth creation, on a long-term basis!

Right Issue Of A Stock

As the name implies, a right issue of a share implies an investor's eligibility to apply for more shares of equity which one is already holding, as a matter of right. For this purpose, a corporate announces ratio of shares one could apply based on one's holding and the offer price. Normally, applying for a right issue is beneficial for two reasons. One, the offer price of a share is often at a considerable discount to its prevailing market price. Secondly, sometimes payment is to be made in a few easy instalments over time. Therefore, one should consider favourably taking advantage of applying a Right Issue.

Bonus Issue

Indeed a bonus issue of shares by a corporate is a reward for a shareholder's loyalty towards the company through the distribution of reserve funds. Bonus issue of shares refers to a company allocating additional shares from its earnings or existing reserves to existing stockholders. A bonus issue increases a company's outstanding shares but not its market capitalization, as the stock price adjusts proportionally to the additional shares issued. Nevertheless, since an investor gets bonus shares free of cost and post bonus, there are chances of price increase, which adds to one's wealth. To take advantage of such an offer, one should pep up one's holding before the record date for the issuance of shares for added gains.

Demerger And Merger Plans

The demerger of a share is a corporate action whereby the listed company breaks up into two or more independent companies, and the existing shareholder gets shares of new companies. On listing, the combined value of demerged entities often exceeds the original company's value in due course of time. Likewise, sometimes a corporate remerge some demerged entities into one

company. The process is called reverse merger. Such a development might lead to value creation for investors. So, watching and considering such actions for possible wealth creation is desirable.

Splitting Of Face Value Of A Share

Every share originally has a face value of Rs. ten. However, to increase liquidity and to make it easily accessible and affordable to investors, especially small investors, sometime Corporates undertake splitting of the face value of a particular stock to a lower denomination, down from its original value of 10 to 5, 2 or 1. Quite often, post-splitting, the combined value of a stock appreciates considerably immediately or over time. So, such a development should be considered wisely.

Buy Back Of Shares By A Company

Buyback of a stock is a phenomenon whereby a corporate buy back its shares to increase its holding percentage and effectively utilise its reserve funds for the growth and development of the company. Invariably, the buyback price announced by the corporate is at a reasonably high incremental price compared to the prevailing market price. For this purpose, a corporate has two options at its disposal. These options include direct buyback from the stock market or the tender route. For the latter purpose, which is the preferred route for an investor, an investor offers a suitable number of shares through the exchange from its holding at a price notified by the corporate. The company can pick up the number of shares, as per their choice, which may be the total on offer or a part of it. Hence, in any case, the tender route proves rewarding for an investor.

Policy Actions

Any major government-sponsored or corporate-level policy action, such as product price, added demand for a new product line, for example, the policy of mixing ethanol with petrol as fuel for vehicles; the import-export policy of commodities, performance linked incentives scheme etc., sometimes create an immense effect on the market value of a stock. Even top-level managerial changes in a corporate may impact the market value and respect of the company in the market!

Bulk Deals/ Acquisitions

Bulk buying and selling a stock markedly affect the market price of equity. Therefore, investors should keenly watch and try to understand such developments to take suitable, advantageous decisions in their interest.