Purpose of Corporate Actions

What is the Purpose of a Corporate Action?

Corporate Actions are majorly undertaken by the company’s directors for the following purposes: -

1.Corporate Restructuring

Corporate Restructuring can be thought of as a process that radically changes the contractual relationships existing between a company & its shareholders, employees, creditors & other stakeholders. It is done with a view to aid the long-term profitability of the company. Some of the common examples include Spinoffs, Mergers and Acquisitions, Debt Restructuring, etc.

The spin-off (creating a new company from the subsidiary or division of an existing parent company) of PayPal from its former parent E-Bay on July 15, 2015 is an example of corporate action undertaken for the purpose of Corporate Restructuring. 

2.Impacting Share Price

The liquidity of the stock is greatly impacted if the stock price is extremely high/low. There is a general tradition amongst retail traders to shy away from high-priced stocks. On the other hand, if the price is too low, the stock might be perceived as a bad investment. Corporate actions like Stock Splits, Reverse Stock Split and Buybacks are used to influence the stock price.

For instance, In March 2020, Bajaj Steel Industries announced a stock split of 1 equity share of Face Value ₹10 each into 2 equity shares of ₹5 each. 

3.Distributing Profit to Shareholders

The dividend distributed could be in the form of cash or stock dividends. In the case of a cash dividend, the company declares a dividend to be paid on each outstanding share. However, the bonus issue involves an issue of additional shares to shareholders instead of cash.

Note: We will discuss the concept of dividends in the next section. 

In 2019, HCL Technologies issued bonus shares in a ratio of 1:1, i.e., existing shareholders of the company received an extra equity share for each share held by them.