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Corporate Actions and its Implications

It is good to know that day by day the number of Public Limited Companies are increasing, issuing IPOs to raise funds from the public and getting registered with stock exchange which ultimately facilitates public participation in stocks trading. For trading people must have a Demat account which holds shares and securities in electronic form. Recently the number of Demat accounts crossed the figure of 10 Crore mark and out of these five crore investors joined in the last less than two years. 30% of these accounts are from Maharashtra and Gujarat and only four states have double digit penetration in the stock market. Interestingly, the growth in investors in the recent past has been more pronounced in other parts of India also which indicates increasing interest of people in investing in the stock market also known as the equity market. Equity markets are meeting points for issuers and buyers of stocks in a market economy. Equity markets facilitate companies to raise capital and investors to own a piece of a company and both have the same goal to generate maximum return on investment. Company does it by expanding business and sharing profits to shareholders. The main benefit from an equity investment is the possibility to increase the value of the principal amount invested which comes in the form of capital gains and dividends. All investments are associated with several types of risk and all investors also have different risk appetites so before investing investors should analyze their risk appetite and find out whether the investment product is as per their appetite or not. Being an Investment Adviser I understand my responsibility to make you aware about the fact of investment. Here I will try to explain about the Corporate Actions and its impact upon shareholders.

Corporate Actions

Apart from those related to business a company initiates several actions that have a direct implication for its stakeholders. These include sharing of surplus with the shareholders in the form of dividend, changes in the capital structure through the further issue of shares, buy backs, mergers and acquisitions and delisting, raising debt and others. These initiatives are known as Corporate Actions. When a company makes a public issue of shares, then the people invest their small savings also in that company and these investors are known as minority shareholders. Hence the regulator has responsibility to protect the interest of all these shareholders therefore all corporate actions are regulated by provision of the below listed Regulations-

  • Provisions of the Companies Act, 2013,
  • Relevant regulations of SEBI, and
  • Terms of the listing agreement entered into with the stock exchange.

and all corporate actions need to follow the requirements prescribed by these regulations. This includes giving notice to the regulators, stakeholders and following the disclosure norms laid down in the applicable clauses.

Purpose of Corporate Actions

The main reasons company use Corporate Actions are

  • Return of profits to shareholders- like Bonus Issue
  • Influence the share price- like Delisting, Stock Splits, Buyback
  • Corporate restructuring-like Merger

Who is entitled to get the benefits of Corporate Actions

Corporate Actions and its benefits apply to all Investors

  • who appear in the register of members, if the shares are held in physical form or
  • whose names appear in the register of beneficial owners maintained by the depository, in case of dematerialized shares.

In order to determine this, the company announces a record date or book closure period and investors whose names appear on the records on this date become eligible shareholders to receive notice of the relevant corporate action and benefit.

Types of Corporate Actions

As an Investor you should know about the following corporate actions and their implications:

  • Dividends
  • Rights Issue
  • Bonus Issue
  • Stock Split and Consolidation
  • Mergers and acquisition
  • Demerger / Spin-off
  • Scheme of arrangement
  • Loan restructuring
  • Buyback of shares
  • Delisting and relisting of shares
  • Share swap

 

By Bimal Chandra Jha

(SEBI Registered Investment Adviser)

 

 

 

 

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