Corporate Actions

Companies undertake corporate actions to achieve strategic objectives such as enhancing shareholder value, restructuring capital, improving liquidity, or complying with regulations. These actions help businesses reward investors, optimize financial structure, attract new investments, and strengthen market positioning. For instance, dividends and buybacks provide returns to shareholders, bonus issues and stock splits improve liquidity, and mergers or spin-offs enable growth and operational efficiency. Each corporate action serves a specific purpose aligned with the company’s long-term goals.

Corporate actions are broadly classified into mandatory, mandatory with options, and voluntary actions.

1. Mandatory Corporate Actions (Applied automatically to all shareholders)

✔ Dividends – Profit distribution in cash or stock.
✔ Bonus Shares – Free shares issued in a fixed ratio.
✔ Stock Splits – Shares split into smaller units to improve liquidity.
✔ Mergers & Acquisitions – Companies combine or acquire others, affecting shareholding.
✔ Spin-offs – A business unit is separated into an independent company.

2. Mandatory Corporate Actions with Options (Shareholders have a choice)

✔ Rights Issue – Existing shareholders can buy additional shares at a discount or choose to ignore it.
✔ Stock Buyback (Share Repurchase) – Company offers to repurchase shares at a premium, but shareholders can accept or decline.

3. Voluntary Corporate Actions (Shareholder participation required)

✔ Tender Offers – Company or investor offers to buy shares at a specified price.
✔ Takeovers – One company attempts to acquire another; shareholders vote to accept or reject.
✔ Employee Stock Option Plans (ESOPs) – Employees receive the option to buy company shares at a discounted price.

Each corporate action affects stock price, liquidity, and investor returns differently.

A reverse stock split is a corporate action in which a company reduces the number of outstanding shares by consolidating multiple shares into one, thereby increasing the stock's price per share. It is also known as stock consolidation or share rollback.

Key Features of a Reverse Stock Split:

✔ Ratio-Based Consolidation – For example, in a 1:10 reverse split, 10 existing shares are merged into 1 new share.
✔ No Change in Market Capitalization – The total value of the company remains the same.
✔ Higher Stock Price – The share price increases proportionally after consolidation.
✔ Common Reasons:

• Maintain listing requirements on stock exchanges (if the price falls too low).
• Improve investor perception and avoid being seen as a "penny stock."
• Reduce volatility and attract institutional investors.

Example:

If you own 1,000 shares at ₹10 each and the company announces a 1:10 reverse split, you will now have 100 shares at ₹100 each, maintaining the same investment value of ₹10,000.

A merger or acquisition (M&A) is a corporate action where two companies combine or one company takes over another. This process affects shareholders, employees, and market value.

1. Mergers (Company A + Company B = Company C)

✔ Two companies combine to form a new entity.
✔ Shareholders receive new shares in the merged company.
✔ Example: HDFC Ltd. merged with HDFC Bank.

2. Acquisitions (Company A acquires Company B)

✔ One company buys another, which may continue to operate under its brand or be absorbed.
✔ Shareholders may receive cash or shares in the acquiring company.
✔ Example: Tata Sons acquired Air India.

A carve-out is a corporate action where a company sells a portion of its business or subsidiary while retaining partial ownership. It allows the parent company to unlock value while maintaining strategic control.

Key Features:

✔ Partial Divestment – A segment or division is separated but not fully sold.
✔ New Entity Creation – The carved-out business may operate independently.
✔ Stock Market Listing (Optional) – Shares of the new entity may be offered to the public through an IPO.
✔ Retained Control – The parent company often holds a majority stake.

Example:

✔ E.g., In 2019, HP Enterprise carved out DXC Technology, forming an independent IT services firm while retaining some ownership.

A buyback, or share repurchase, is a corporate action where a company repurchases its own shares from existing shareholders, reducing the total number of outstanding shares in the market.

✔ Increase Share Value – Fewer shares in the market can boost earnings per share (EPS) and stock price.
✔ Utilize Excess Cash – Companies with surplus cash return value to shareholders instead of sitting on idle funds.
✔ Boost Investor Confidence – A buyback signals that management believes the stock is undervalued.
✔ Prevent Hostile Takeovers – Reducing publicly available shares makes it harder for external entities to gain control.
✔ Tax Efficiency – Compared to dividends, buybacks can be a more tax-efficient way of rewarding investors.

Example:

In 2023, TCS announced a ₹17,000 crore buyback at a premium price, benefiting shareholders by offering them an exit at a higher value.

A proxy vote is a method that allows shareholders to authorize someone else to vote on their behalf at a company's annual general meeting (AGM) or special meetings. This is useful for shareholders who cannot attend in person but still want their voices heard in key corporate decisions.

Key Features of Proxy Voting:

✔ Representation – Shareholders appoint a proxy (individual or institution) to vote for them.
✔ Voting on Key Issues – Includes board elections, mergers, dividends, executive compensation, and other corporate actions.
✔ Proxy Forms & E-Voting – Votes can be cast physically, electronically, or via proxy forms.
✔ Institutional Investors’ Role – Large investors like mutual funds often use proxy voting to influence corporate governance.

Example:

If a shareholder cannot attend Reliance Industries' AGM, they can submit a proxy vote to express their decision on board appointments or dividend payouts.

A bankruptcy filing is a legal process where a financially distressed company or individual declares inability to repay debts and seeks protection from creditors. It allows restructuring or liquidation of assets under court supervision.

Types of Corporate Bankruptcy:

✔ Liquidation (Winding Up) – The company sells assets to repay creditors, and operations cease.
✔ Reorganization (Restructuring) – The company continues operating under a court-approved debt repayment plan.

Key Reasons for Bankruptcy:

✔ Excessive debt and inability to meet obligations.
✔ Declining revenue, mismanagement, or economic downturns.
✔ Legal liabilities or operational inefficiencies.

Example:

✔ Jet Airways (2019) filed for bankruptcy due to high debt, leading to temporary shutdown and restructuring under India's Insolvency and Bankruptcy Code (IBC).

Delisting is the process of removing a company's shares from a stock exchange, making them unavailable for public trading. Once delisted, the company’s shares can no longer be bought or sold on the exchange.

Types of Delisting:

✔ Voluntary Delisting – The company chooses to delist, often due to mergers, buyouts, or plans to go private.
✔ Involuntary Delisting – The exchange forces a company to delist due to non-compliance with regulations, financial instability, or failure to meet listing requirements.

Key Reasons for Delisting:

✔ Corporate Restructuring – Mergers, acquisitions, or going private.
✔ Regulatory Non-Compliance – Failure to meet SEBI or exchange guidelines.
✔ Consistent Poor Performance – Continuous low stock price, low trading volume, or financial distress.

Example:

✔ Vedanta Ltd. attempted voluntary delisting in 2020 but failed as shareholder participation was insufficient.

Corporate actions significantly influence a company’s stock price, either positively or negatively, based on investor perception and financial impact.

1. Positive Impact (Stock Price May Rise)

✔ Dividends – Investors view dividend payments as a sign of financial strength, often leading to a price increase.
✔ Bonus Shares – Though the share price adjusts, investor confidence remains high, keeping demand stable.
✔ Stock Buyback – Reducing the number of shares in circulation boosts Earnings Per Share (EPS), often leading to a higher stock price.
✔ Mergers & Acquisitions – If seen as a strategic growth move, stock prices can rise due to positive market sentiment.

2. Negative Impact (Stock Price May Fall)

✔ Stock Splits – Though beneficial for liquidity, lower per-share prices may create a perception of reduced value.
✔ Rights Issue – Since companies issue shares at a discount, stock prices may drop due to dilution concerns.
✔ Delisting – Stock price typically falls as public trading access is removed.
✔ Bankruptcy Filing – Severe financial distress leads to a sharp stock price decline.

Example:

✔ TCS Buyback (2023) boosted stock value as investors saw it as a sign of confidence.
✔ Yes Bank's 2020 Crisis led to dilution and stock price decline after a restructuring plan.

Yes, corporate actions can have tax implications for investors, depending on the type of action and applicable tax laws.

1. Taxable Corporate Actions

✔ Dividends – Taxed as per the investor’s income tax slab in India.
✔ Buybacks – Companies pay a buyback tax (20% + surcharge & cess), but investors are exempt from capital gains tax on buyback proceeds.
✔ Rights Issue – Buying rights shares isn’t taxed, but selling them may attract capital gains tax.
✔ Mergers & Acquisitions – If shareholders receive cash, it may be taxed as capital gains.

2. Tax-Neutral Corporate Actions

✔ Bonus Shares – No tax at issuance, but capital gains apply when sold.
✔ Stock Splits – No tax on the split itself; taxation occurs when shares are sold.
✔ Delisting – Gains from selling delisted shares attract capital gains tax based on holding period.

Example:

✔ TCS Buyback (2023) was tax-free for investors since the company paid the buyback tax.
✔ Dividends from Reliance Industries are taxed as per the investor’s slab rate.