Parth Verma I The Valuation School

CHAPTER 9

CORPORATE ACTIONS

Learning objectives

To know about the following corporate actions & their implications :

• Dividend
• Right Issues
• Bonus Issue
• Stock split & consolidation
• Mergers & Acquisition
• Demerger / Spin Off
• Scheme of arrangement
• Loan restructuring
• Buy back of shares
• Delisting & Relisitng of shares
• Share swap

9.1 PHILOSOPHY OF CORPORATE ACTIONS

• A business has a lot of activities but apart from some of that have a direct implications
for its stakeholders.

• A public company has to protect the right of minority investors.

 Parth Verma The Valuation School

• Corporate actions are protected/ regulated by the following provisions:

1. Provisions of the Companies Act, 2013.

2. Relevant regulations of SEBI.
3. Terms of the listing agreement entered into with the stock exchange.

• All companies need to follow the requirements for their corporate actions prescribed by
these regulations.

• All the corporate actions and benefit are applicable to all investors who appear in the
register of member.

• To determine the eligible investors, company announces a record date or book closure period.

9.2 DIVIDEND

• Post tax profit belong to the shareholders.

• Company can do 2 things with those profits

Return them for investment. Return to the shareholders

• Returning profit to the shareholders in equal proportion is called as Dividend.

• Usually companies do both :

- Retain for investment (+)
- Declaring a dividend

• If company declare dividend during the financial year , then it's called as " Interim
Dividend".

• If company declare dividend at the end the financial year , then it's called as " Final
Dividend".

• SEBI mandated that the dividend declaration should be in the rupees per share basis as
against previous practice of declaring dividend as a percentage of face value.
 Parth Verma The Valuation School

• Example :

50% dividend declared by 2 companies "A" & "B"

(for face value ). A's face value = ₹2
B's face value = ₹ 10

50% of ₹2 = ₹1 = Dividend by A
50% of ₹10 = ₹5 = Dividend by B

This method creates confusion in investors.

Therefore it is now required to declare dividend as :—

-Company A declared dividend of ₹1 per share &

-Company B declared dividend of ₹5 per share .

• Historic dividend tracks record of a company may be seen from Payout Ratio.

( Company apne total profits se kitna hissa shareholders ko distribute kar Rahi hai )

• Payout ratio = Dividend Per Share (DPS)

Earning Per Share (EPS)

• Entire dividend is taxable in the hands of shareholders. Company deducts 10% tax on
dividend income > ₹5000 under Section 194 of the IT Act.

9.3 RIGHT ISSUES

• When a company needs additional money , it has 2 choices :

1. DEBT ( but interest dena padega , so this is cancelled )

2. Equity ( we are doing this)

- raise money from existing shareholders

- issue fresh share for investors.
• So in case of fresh issue the holdings of existing shareholders gets diluted.
• Example :

If a company has 10 lakh shares of ₹10 - Issues & Paid up capital = ₹10 Lakh * 10 = 1
crore

If a company issues another 10 Lakh fresh shares, then

No of shareholders = 10 lakh (previous) + 10 lakh (new) = 20 lakh

Issued & Paid Up capital = 20 lakh * 10 = 2 crore

In this case if a person holds 1lakh share then his holding is 10% of 10 lakh.

But after fresh issue the same investor holding becomes 5% of 20 lakh ( I.e ., 1 lakh )

HOLDING GET DILUTED.

• To prevent this, companies require to raise money by first offering its existing
shareholders & they only it can issue fresh shares and this is called as right issue.

• Subscribing to right issue is a choice & not compulsion.

• One can also transfer their right to another person for consideration or without
consideration this is called renunciation of rights.

• Shares under right issues are generally offered at a discounted price to the Current
Makret Price.

• No of discounter share & shareholder can buy depends on the number of shares held
by him / her.

• For example :
Company issues 1 for 2 right issues at a discounted price,
So if an investor has 10 shares, the he can buy 5 more shares at discounted price.

• Companies allow to apply for additional shares also because some shareholders neither
apply for right issue or transfer it.

Parth Verma The Valuation School

 Parth Verma The Valuation School

• Right issue must follow all SEBI's regulations.

• Record date shall be fixed to determine the eligibility of rights.

• The company must issue a letter of offering giving details of the issue. The draft letter
must be filled with SEBI.

• An abridged lefter of offer must be given to investors ,3 days before opening of the
issue.

• A right issue is open for a period of 15 days (min) and 30 days (max)

9.4 BONUS SHARES

• Also known as Equity Dividend alternative of cash dividend.

• These are issued to the existing shareholders without consideration from them.

• No change in the value of investors holdings. It is to influence the psychology of

investors without any economic impact.

• Reserves lying in the books of the company gets transferred to another head I.e., paid
up/ subscribed capital. Bonus is given from free reserves.

• 1:3 bonus represents for every 3 existing / holding share, the investor gets 1 bonus share
( 3 ke badle 1)

• Company can't issue bonus :

1. From revaluation of assets.
2. If it's defaulted on interest payment or principal on any debt security.

• Issuance of bonds is termed as Capitalization of reserves.

• No economic changes from bonus impacts the earning per share , book value per share,
market price per share etc ( per share data) immediate deteriorates.

• No negative impact to the shareholder.

 • no negative impact to the shareholders.

• Eg : 1:1 Bonus

Before bonus After Bonus

No. Of shares 100. 100 + 100 = 200

Share Price 1000. 500 (1000/2)

Investment 100*1000 = 1L. 200*500 = 1L

9.5. STOCK SPLIT

• In this, the face value of shares is reduced in a defined ratio.

• 1:5 means splitting of 1 share into 5 shares. But the face value of share will also go down
to 1/5th of the original face value.

• Example :

1:5 Before split After split

No. Of shares 100. 500

Face value 10. . 2

• No change in companies share capital.

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• It is done when share prices of a company in the secondary market becomes very high
or unaffordable for many investors.

• No economic benefit from the split, it is also a book entry only.

• It influence the psychology of investors but per share data like EPS, BVPS, etc
immediately deteriorates.

• No negative impact on shareholders.

• Example :

1 : 10 stock split

Before split After split

No. Of shares 100. 1000

Share Price 2700. 270

Investment 100*2700 = 2.7L. 270*1000= 2.7L

Face value 10. 1

9.6 SHARE CONSOLIDATION

• Reverse of stock split.

• 5 : 1 , means consolidation of 5 shares into 1 shares.

• Face value will increase but the No of outstanding share decrease.

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 Parth Verma The Valuation School
• example :

5:1
Before consolidation After consolidation

No. Of shares 500. 100

Face Value 2. 10

• It is done when share price of a company in the secondary market is very low.

• It affects the perception of investors as a bad stock.

• No economic benefit from consolidation , it is also a book entry.

• It influences the psychology of investors but per share data like earning per share, book
value per share, market price per share, etc immediately improves.

• No positive impact on shareholders.

• Example :
5 : 1 consolidation,

Before After

No of shares. 500. 100

Share price. 5. 25

Face value. 2. 10

Investment. 500*5 = 2500. 100*25= 2500

• No change in Investment amount.

 9.7 MERGER & ACQUISITIONS

• These actions results in change in the ownership structure of the involved companies.

• In merger, acquirer buy up the shares of the target & is absorbed into the acquiring
company. Both the companies will work together as a single entity (jointly). Example :
Vodaphone , Idea .

• In a question or takeover, the acquirer buys all or a substaincial portion of stock of target
company. Acquirer becomes the decision maker for the target company.

• In consolidation, companies combine together to form a new company & the merged
companies cease to exit.

• Reasons for M&A

1. Synergy : As each company have different strengths when combined may result in
great economic benefits

2. Results in Increased revenue & market share.

3. Companies in different geographical area gives competitive advantage (diversification).

4. Taxation : Profitability company acquires a loss making company for tax saving.

• In these corporate actions , the shareholding pattern may change and public shareholders
can exit from the company.

• These corporate actions needs to follow SEBI rules.

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 Parth Verma The Valuation School

9.8 DEMERGER / SPIN OFF

• In this, a company divides into different separate companies.

• The shareholders receive shares in the new company in proportion to their shares
held in the parent company.

• Example :
In April 2018, Adani Enterprises

spun off its renewable energy business info

Adani Green Energy Limited.

9.9 SCHEME OF ARRANGEMEN T

• When companies fail to fulfil its commitment to its creditors (from whom the
company has borrowed the money ) or fail to redeem preference shareholders
( company is not been able to generate profits ) then under this situation ,
company and the creditors or performance shareholder may enter into a scheme
of arrangement to solve the issue.

(shareholders with no voting rights & no right to participate in management but

the rate of dividend is fixed)

• It is a court monitored settlement process. It involves reorganisation of share

capital of the company.

• Existing shareholders can give up their part of ownership in favour of creditors

or consolidation or division of class of shares.

• It is sought by the company or its creditors / members & shall approach the
National company Law Tribunal (NCLT) for the same, under section 230 of
Companies Act, 2013.
 Parth Verma The Valuation School

9.10 LOAN RESTRUCTURING

• When a company is not been able to pay off its debt due to any situation like financial
distress then they can restructure the debt by modifying one or more terms of loans.

• This includes loan amount, rate of interest, mode of repayments, etc.

• It is advantageous as borrower is given a way to repay the loan & not be declared
defaulter.

• And the lender gets the loan amount that would otherwise have to be written off as a
bad debt.

• For loan restructuring, current and future financial position of the company must be
analysed to create a plan to generate revenue to meet the financial needs.

9.11 BUYBACK OF SHARES

• If company has excess cash, then it can be used to :

- Expand business
- Reduce liabilities
- Distribute to shareholders

• Distribution to shareholder can be done with Dividend or buyback.

• BUYBACK means shareholder can sell their stocks back to the business / company
itself.

• It enhances the Earning Per share ( EPS) & Book Value Per share (BVPS).

• Motives of BUYBACK
- Gives boost to the stock which is seems as undervalued.
- Lack of profitable investment opportunities for excess cash.
- It boost the confidence for the business and act as defence against a takeover.
- To reduce the number of shares (equity)
- It reduces promoters holding being diluted on account of say ESOPs.
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• BUYBACK is done only with the available reserves & surplus. Company should not have
defaulted on its payment of interest or principal for a BUYBACK.

• BUYBACK can be done using the tender method (offering existing shareholder on
proportionate basis) through book building or stock exchange or from lot trader.

• It results in reduction of outstanding shares, no change in P/L, increased EPS , higher

divided.

9.12 DELISTING AND RELISTING OF SHARES

• Delisting = Permanent removal of shares of a company from being listed on stock exchange.
• 2 types of delisting :

1. Compulsory delisting :
When company fail to follow the rules & regulations of the listing agreement.

2. Voluntary Delisting :
The company itself chooses to get delisted and go private.

• Motives :
- Regulatory reporting complexities & compliance overhead to merger & acquisition.
- Freedom to execute other strategies for business.

• According to SEBI, promoter group has to provide exit to all shareholders, they should
invite bid to acquire through reverse book building process.

• Promoter need to specify flood price and shareholder specify the selling price. Promoters
can accept , reject or negotiate / counter offer to the public.

• In voluntary delisting promoter must have holdings of more than 90%. At least 25% of
shareholders should participate in reverse book building process.

• After delisting if shares are still held by public then also they have the right to sell their
share to promoters. Promoters can buy those shares at exit price within 1 year.
• Listing of share after delisitng is called as relisitng. A company can resist :-
- 5 years after voluntary delisitng.
- 10 years after compulsory delisitng.

9.13 SHARE SWAP

• Exchange one set of shares with another is share swap.

• It is used during merger & acquisition.

• Acquiring company uses stock as cash to purchase the business.

• Acquired company receives amount of shares from the acquiring company.

• Before swaps, both the companies must accurately value their companies for a fair swap
ratio.

Parth Verma The Valuation School