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Understanding Corporate Action - Part One

BY: Vivek SHARMA | Category: Finance | Submitted: 2010-12-16 14:46:34
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Article Summary: "The article is the first in the series of article which provide details on what is a corporate action. The article does classification of corporate actions..."

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Corporate action means an action initiated by the company which makes an impact on the security issued by the company. Corporate actions are segregated on different basis across the world.

In India, corporate actions are divided into:

Monetary or cash corporate action:

This kind of corporate action results into payment by the company in form of cash. Example of cash or monetary corporate action is payment of dividend by the company on its shares or payment of coupon on bond issued by the company. When a company pays dividend on its shares, the price of the company's share goes down to the extent of dividend payment. Similarly payment of coupon on a bond will have impact on its price, if the bond is being traded in the market.

Non Monetary or non cash corporate action:

In this kind of corporate action, the company initiates an action which results into payment in non-cash form. Examples of non cash corporate action is bonus shares, rights issue, split, consolidation etc.

Outside Indian market i.e. globally corporate actions are divided into three parts. These are identified as:

Voluntary corporate action:

Voluntary corporate action is an event in which there is no obligation on the investor's part to take up any offer made to him, although an investment decision even to take no action still needs to be made. An example is a rights issue where an investor can either decide to subscribe to the rights issue or renounce the rights in favour of somebody else.

Mandatory Corporate Action:

In contrast, a mandatory event will take place regardless of the views of the investor. Investors have a say in the proposals when they were discussed and voting happened on them during the company meeting. A straightforward example of mandatory corporate action is a stock split, where each share is split into a number of other shares, which reduces the market price of each share but with an increase to the number of shares in issue.

Mandatory events with options:

This event type is a combination of the above two. In this type of corporate action, there is an element which is mandatory and then after this the shareholder has an investment decision to make. An example is where a dividend is to be paid, and the investor has the option of taking the dividend in cash or as additional shares. There is normally a company set default. In this case, if no indication of preference is received from the investor within the period of response, they will receive the default, which is usually cash in this example.

Though the method of classification of corporate actions may be different, they continue to have some characteristics.

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