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Corporate Action

Itis an event initiated by apublic companythat affects the securities (equityordebt) issued by the company,companys financial structure and ultimately the stakeholders

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Types of Corporate Actions


Corporate actions are classified as:

Voluntary Mandatory and Mandatory with choice

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Types of Corporate Actions Contd.. Mandatory Corporate Action:

It is an event initiated by the corporation and by the board of directors, that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend.
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Types of Corporate Actions Contd.. Voluntary Corporate Action:

These are actions requiring a decision from the investor on whether or not to participate. Companies will not process these actions automatically because, the decision on whether to participate will vary for every investor. Shareholders may chose to take no 5/23/12 action which will leave their securities

Types of Corporate Actions Contd..

Mandatory with Choice:

This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options An example is cash or stock dividend option with one of the options as default
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A list of Corporate Actions Events / Corporate Actions Types

For EQUITIES: Mandatory Events

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Mergers
Amergeroccurs when two or more companies combine into one while all parties involved mutually agree to the terms of the merge. The merge usually occurs when one company surrenders its stock to the other. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when 5/23/12

Acquisition
Acquisition means a bigger company acquiring a smaller one for further expansion. The acquiring company often offers a premium on the market price of thetarget company's shares in order to attract shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones wasequal to a65% premium overthe stock'smarket price. 5/23/12

Bonus Issue

Also known as Stock Dividend Shareholders are awarded additional securities (shares, rights or warrants), in proportion to their holding, free of payment Acompany calls a Bonus Issue to increase the liquidity of the company's shares in the market. Increasing the number of shares in circulationreduces the share price.
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Cash Dividend

Distribution of cash to shareholders, in proportion to their equity holding Effects of a Dividend on the share price

Example, if an investor owns 100 shares and the cash dividend is Rs. 0.50 per share, the owner will receive Rs. 50 in total.

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Shareholders in companies which

De-merger
A business strategy in which a single business is broken into components, either to operate on their own,to be sold or to bedissolved. A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different 5/23/12

Spin-off

The event through which a new company is created and separated from its parent company. After the event there are 2 separate companies, each with their own outstanding share capital. Shareholders of the parent company will be givensome amount of shares in the spun off company according to a ratio (for example, each shareholder in parent company A will receive 5 shares in the 5/23/12

Stock split

A corporate action in which a companys existing shares are divided into multiple shares. For Ex. A company with 100 shares of stock price Rs 50 per share (100*50 = 5000). The company splits it shares 2 for 1. There are now 200 shocks for Rs 25 each (200*25 = 5000) . The reason why companies split their stock is to make them more affordable to 5/23/12 investors because stock price reduces

Mandatory Events with Options


Cash Dividend Merger and Acquisition and Spin Off

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Voluntary Events

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Buy-back program /Repurchase BuybackOffer is an action in which


company offers to buys back its stock from the current share holders at an attractive price. The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company. A company may decide to reduce its capital when it has excess liquidity and an insufficient return on equity. By repurchasing its own shares, the company automatically reduces its cash balance. The
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Rights Issue
It refers to offering additional shares to the current shareholders of the stock. This is done by companies to raise capital for further expansion. It provides its existing shareholders the right to buy the stock at discounted rates Assume company XYZ has announcedrights issue in the ratio of 5:2 5/23/12

Corporate Actions For BONDS:

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A bond that can be converted into a predetermined amount of the company's equity at a given time, usually at the discretion of the bondholder Issuing convertible bonds is one way for a company to minimize negative investor interpretationof its corporate actions.
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Conversion of convertible bonds

CouponPayment-interest payment The issuer of the bond pays interst according to the terms and conditions of the bond, ie interest rate. Early Redemption The issuer of the bond repays the nominal prior to the maturity date of the bond, normally with accrued interest. Partial Redemption 5/23/12 The issuer of the bond repays part of the

Other Corporate actions with regard to Bonds

Registered shareholders are told of the event by the company's Registrar. Such information is disseminated via online portals

How a Company announces Corporate Actions?

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How a Company announces Corporate Actions? Contd..

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How a Company announces Corporate Actions? Contd..

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Need of Corporate Actions


The primary reasons for companies to use corporate actions are:

Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share.

Bonus is another case where the 5/23/12 shareholder is rewarded

Need of Corporate Actions Contd..

Influence the share price:

If the price of a stock is too high or too low, the liquidity of the stock suffers

Stocks priced too high will not be affordable to all investors Stocks priced too low may be de-listed

Corporate actions such asstock splitsorreverse stock 5/23/12

Need of Corporate Actions Contd..

Corporate Restructuring:

Corporations re-structure in order to increase their profitability

Mergersare an example of a corporate action where two companies that are competitive or complementary come together to increase profitability

Spinoffsare an example of 5/23/12 a corporate action where a company

Corporate Actions Risks


For many years Corporate Actions have been known to be very risky. The smallest mistake can easily result in huge losses

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Types of Corporate Actions Risks

Financial risk

A mistake can easily lead to a substantial financial loss or -gain. (just like making losses, it is also possible to end up with a gain as a result of a mistake).

Audit risk

The industry is being closelyregulatedand auditors will make sure that every procedure is being adhered 5/23/12 to. Making a profit as a result of devation

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