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CORPORATE ACTION

CORPORATE actions are events initiated by corporates that impact shareholders.

These could be cash corporate actions such as dividends/interest payments or non-cash actions such as issue of bonus shares, splitting the face value, consolidation, merger, and so on, that result in change in the number of securities held by the shareholder or allotment of other securities to the shareholder.

On announcement of corporate action by an issuer, the issuer or its registrar and transfer agent (R&T agent) informs Depository about the details of the proposed corporate action.

On receiving such information, Depository informs all its depository participants (DPs) about the corporate action and DPs are asked to take the following steps:

Update the changes in tax status, bank details, address, and so on, in the beneficial owners' accounts well in advance of the book closure or record date for the corporate action. All balances in the CM pool accounts to be transferred to the relevant beneficiary accounts well in advance of the book closure or record date for the corporate action. On the basis of an electronic request placed in the Depository system by the issuer or its R&T agent, Depository electronically downloads the beneficial position details as of book closure or record date for the corporate action to the issuer or its R&T agent. The details provided by Depository include particulars such as name, address, bank details, and so on, of the beneficial owner.

The issuer allots the securities and informs Depository about allotment details of all beneficial owners who have opted to receive securities in electronic form. On receipt of these details, credits are effected in the accounts of the beneficial owners on the execution date requested by the issuer. If the details of accounts to which the issuer has made all allotments do not match with those maintained at Depository, such records are rejected.

IPOs

Investing in Initial Public Offering (IPOs) can open a number finance gates for any business. The prime need for an IPO arises when a company requires money to expand and grow. This is done by borrowing or issuing shares and if the company decides to issue shares, it must invite public investors to buy its shares. This is known as the company’s first public invitation in the stock market and is thus, called the Initial Public Offering. When you buy these shares, you get ownership in the company equals to the value of your shares. After which these shares are then listed on the stock exchange.

The Securities and Exchange Board of India (SEBI) controls and manages the complete process of IPO. A company that expects to issue shares through IPOs first registers itself with SEBI.

SEBI then thoroughly analyses and studies the documents submitted by the company and approves only after being completely convinced. By the time the company gets approval from SEBI, it prepares its prospectus mentioning that SEBI’s approval is pending.

After getting the approval, the company fixes the price of the share and the number of shares it plans to issue. There are two types of IPO issues: fixed price and book building. In the former, the company decides the price of the share in advance. In the latter, the company offers a range of prices. You then need to bid for shares within this range.

After deciding on the type of issue it wishes to go ahead with, the company makes the shares available for the public. Then the investors submit applications showcasing their interest in buying the shares. After the company gets subscriptions from the public, it goes ahead with the allotment of shares.

The final step in this process is listing the shares on the stock market. Once the shares are issued to investors in the primary market, they get listed in the secondary market. Trade in these shares then becomes a daily business.

RIGHTS ISSUE

A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.

The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out.

Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.

A rights issue affects two important elements of a company equity capital and market capitalisation. In case of a rights issue, since additional equity is raised, the issuing companys equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market.

In theory, every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalisation remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalisation. If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse.

kcas@kfintech.com

1-800-4195-111(Monday to Saturday from 9 AM to 6 PM.)

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