Corporate Actions
A corporate action is initiated by the board of directors and approved by the company's shareholders.
Dividends
Dividends are paid by the company to its shareholders.
The dividend paid is also expressed as a percentage of the face value. In the above case, the face value of Infosys was Rs.5/- and the dividend paid was Rs.42/- hence the dividend payout is said to be 840% (42/5).
Dividend Cycle
Dividend Declaration Date
This is the date on which the AGM takes place and the company's board approves the dividend issue
Record Date
This is the date on which the company decides to review the shareholders register to list down all the eligible shareholders for the dividend. Usually, the time difference between the dividend declaration date and the record date is at least 30 days
Ex-Date/Ex-Dividend date
The ex-dividend date is normally set two business days before the record date. Only shareholders who own the shares before the ex-dividend date are entitled to the dividend. This is because in India the normal settlement is on a T+2 basis. So for all practical purposes if you want to be entitled to receive a dividend you need to ensure you buy the shares before the ex-dividend date
Dividend Payout Date
This is the day on which the dividends are paid out to shareholders listed in the register of the company
Cum Dividend
The shares are said to be cum dividend till the ex-dividend date
When the stock goes ex-dividend, usually the stock drops to the extent of dividends paid. For example, if ITC (trading at Rs. 335) has declared a dividend of Rs.5. On ex-date, the stock price will drop to the extent of dividend paid, and as in this case, the price of ITC will drop down to Rs.330. The reason for this price drop is because the amount paid out no longer belongs to the company.
Dividends can be paid anytime during the financial year. If it's paid during the financial year it is called the interim dividend. If the dividend is paid at the end of the financial year it is called the final dividend.
Bonus Issue
A bonus issue is a stock dividend, allotted by the company to reward the shareholders. The bonus shares are issued out of the reserves of the company. These are free shares that the shareholders receive against shares that they currently hold. These allotments typically come in a fixed ratio such as 1:1, 2:1, 3:1, etc.
Companies issue bonus shares to encourage retail participation, especially when the price per share of a company is very high and it becomes tough for new investors to buy shares. By issuing bonus shares, the number of outstanding shares increases, but the value of each share reduces as shown in the example above. The face value remains unchanged
Stock Split
The word stock split- for the first time sounds weird but this happens on a regular basis in the markets. What this means is quite obvious -- the stocks that you hold actually are split!
When a stock split is declared by the company the number of shares held increases but the investment value/market capitalization remains the same similar to the bonus issue. The stock is split with reference to the face value. Suppose the stock's face value is Rs.10, and there is a 1:2 stock split then the face value will change to Rs.5. If you owned 1 share before split you would now own 2 shares after the split.
Rights Issue
The idea behind a rights issue is to raise fresh capital. However, instead of going public, the company approaches its existing shareholders Think about the rights issue as a second IPO but for a select group of people (existing shareholders). The rights issue could be an indication of promising new development in the company. The shareholders can subscribe to the rights issue in the proportion of their shareholding. For example, 1:4 rights issue means for every 4 shares a shareholder owns, he can subscribe to 1 additional share. Needless to say, the new shares under the rights issue will be issued at a lower price than what prevails in the markets.
However, a word of caution -- The investor should not be swayed by the discount offered by the company but they should look beyond that. A rights issue is different from a bonus issue as one is paying money to acquire shares. Hence the shareholder should subscribe only if he or she is completely convinced about the future of the company. Also, if the market price is below the subscription price/right issue price it is obviously cheaper to buy it from the open market.
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Buybacks of Shares
A buyback can be seen as a method for a company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market, however, buyback of shares is an important method of corporate restructuring. There could be many reasons why corporates choose to buy back shares...
- Improve the profitability on a per-share basis
- To consolidate their stake in the company
- To prevent other companies from taking over
- To show the confidence of the promoters about their company
- To support the share price from declining in the markets
When a company announces a buyback, it signals the company's confidence about itself. Hence this is usually positive for the share price.
Equity Financing
- Additional equity financing increases a company's outstanding shares and often dilutes the stock's value for existing shareholders.
- Issuing new shares can lead to a stock selloff, particularly if the company is struggling financially.
- Equity financing can be seen as favorable, such as when the funds are used to pay off debt or improve the company.
Right Of First Refusal (ROFR)
- A right of first refusal is a contractual right giving its holder the option to transact with the other contracting party before others can.
- The ROFR assures the holder that they will not lose their rights to an asset if others express interest.
- The right of first refusal can limit the owner's potential profits as they are restricted from negotiating third-party offers before the rights' holder.
- It is a right in a contract that gives shareholders the opportunity of matching the price at which a third party has agreed to buy shares from existing investors or founders
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