What are corporate actions, why are they important, and where must investors look
Ever find yourself scratching your head over terms like dividends, stock splits, or mergers and acquisitions (M&A) when navigating the stock market?
Welcome to the world of corporate actions—a realm that can either make your investment portfolio sing or bring it to its knees.
What Are Corporate Actions?
Corporate actions are decisions a company's board of directors takes that directly impact shareholders. They come in various types—dividends, stock splits, bonus shares, M&As, open offers and even spinoffs.
Each action has a distinct impact on a company's stock price, financial health, and shareholder value.
Companies listed on the BSE and the National Stock Exchange of India (NSE) undergo various corporate actions, and being uninformed is not an option!
Dividends
Dividends are payouts that companies distribute to shareholders from their profits.
While they don't necessarily increase your stock, they offer a return on your investment and a steady income.
Price Impact
Understanding how dividends affect your stock prices is vital for strategic investing.
Aside from the impact of dividend expectations on the stock prices, the ex-dividend price of a stock falls by the amount of dividend paid.
Stock Splits and Bonus Shares
Stock splits involve dividing existing shares into multiple units, thus making them more affordable. Conversely, bonus shares are free shares distributed to current shareholders.
Both actions aim to increase liquidity but come with caveats that investors must understand.
A stock split does not increase the company's equity, so there is no change in the balance sheet.
Bonus shares result in an increase in capital, and this is reflected as liabilities in the balance sheet.
Price Impact
After a stock split, the stock price adjusts proportionally to the additional shares issued.
For example, a 10-for-1 stock split of a share trading at Rs1,000 will see the stock price at Rs100.
Of course, this is a mathematical calculation, but other factors, such as demand and supply, will also matter.
Similarly, a 1-for-1 bonus share will see the price of a Rs 1800 stock halve to Rs 900.
M&A: Open Offers
Merger & Acquisitions can be a game-changer for a company and its stock.
When a merger happens or one company acquires another, the stock prices can go through the roof or plummet.
As an investor, keeping an eye out for M&A announcements can provide significant insights into a stock’s future.
A mandatory open offer is made to the existing shareholders of the target company when a new shareholder acquires a 25% stake in a listed firm.
The acquirer will then have to compulsorily make an open offer to buy an additional 26% shares from the public.
Price Impact
The price of a stock can rise if the open offer price is higher than the market price. If the open offer price is in line with regulatory norms, then the stock price could move based on the conditions associated with the open offer.
Spinoff
A spinoff is a new and distinct company formed when the shareholders of a parent company receive shares in a subsidiary or business division.
A parent company establishes a spinoff with the expectation that it will be more valuable as an independent entity than it was as a subsidiary of the parent company.
Recently, Reliance Industries spun off its financial services company as a separate company, with its shares listed on the NSE and BSE.
Price Impact
In a complete spinoff, the company's stock price immediately before the spinoff should theoretically be equal to the sum of its post-spinoff stock price plus the initial stock price of the spun-off company.
Similarly, M&As can have varied effects depending on how the market perceives the deal. Being savvy about these actions will enable you to make informed decisions.
Financial Health: A Sneak Peek
Corporate actions can also reveal a company's financial health. For instance, frequent stock splits or bonus shares could signal a company's robust performance. At the same time, a lack of dividends might indicate financial trouble.
Tax Implications
Yes, the dreaded T-word! Corporate actions like dividends have tax implications that could affect your net earnings.
So, it's crucial to understand the tax rules associated with each corporate action to avoid unpleasant surprises during tax season.
How to Stay Updated?
Keeping track of corporate actions is easier said than done, especially in the bustling Indian stock market.
However, various platforms offer updates on upcoming corporate actions.
All listed companies have to compulsorily disclose corporate actions to stock exchanges. These disclosures are available as regulatory filings on the stock exchange website.
Knowledge is Power
Corporate actions can be perplexing, but they can also be a goldmine of opportunities if properly interpreted.
They offer valuable insights into a company’s financial standing and can significantly influence your investment strategy.
So, the next time you hear about a corporate action, don't just brush it off. Investigate it further, comprehend its implications, and use that knowledge to guide your investments wisely.