10:28 pm - Monday December 18, 2017

An Overview of Corporate Actions

A corporate action is an event initiated by a company that affects the securities (equity or debt) issued by the company. Some of them are mandatory; some of them are voluntary.

Mandatory Corporate Actions affect all shareholders alike in a passive fashion (they need not take action to gain the benefits of that corporate action). They are carried out mandatorily, and the shareholders do not have a choice in accepting or rejecting the action.  Because they are all common for all shareholders, they are also called common corporate actions.

Some of the examples for mandatory or common corporate actions are Capital Increase, Capital Reduction, Stock Splits/Reverse Splits, Bonus, Cash Dividends, Mergers and Acquisitions, Spin offs, Delisting, Cash Dividend, Stock Distribution,  Full/Partial Call, Mandatory Put, Rights Distributions, Warrants Distributions, Liquidation Payments, Mandatory Exchanges, Mandatory Mergers, Maturity Redemptions

Voluntary corporate actions are corporate actions events wherein the primary holders of the Security Accounts, which are affected by the event are intimated about the corporate action and the response from the customers will determine how the corporate action should be processed for the respective Security Accounts.  Examples for voluntary corporate actions include Tender odd lot, Tender odd lot sales, Modified Dutch Auction, Exchange with bid, Dutch Auction, Sealed bid tender, Tender with bid, Exchange offer/unit, Tender offer / unit, Exchange offer, Maturity with options, Mandatory exchanges, Cash tender, Contract settlement, Plan of reorganization, Change of control, Mini tender, Put with option, Operational put, Early tender, Early exchange, Exchange consent, Tender and consent

In addition to these two major corporate action classifications, we have universal notice corporate action. As the name itself indicates they are of notice type only. Some of them are Name Change, Bankruptcy/Bond, Bankruptcy/Equity, General Meeting, Mandatory Merger, Pre Advice Rights Offering, Unit Separation (Warrants)

Why Corporate Actions?

The purpose of a corporate action is driven by the aims of the issuer, and will vary according to the specific type of corporate action.

Distribution of Income – Profits are distributed to shareholders in the form of dividend payments, whilst interest is distributed to bondholders via interest payments ( coupon payments)

Raising of Capital – When the issuer wishes to raise further capital it may do so either by the issue of new equity via shares, or alternatively via the issue of bonds. The market place as a whole may be permitted to purchase either the new shares or debt, or the issue may be restricted to existing position holders only. In those instances where the issue of new equity at a price is offered to existing position holders only, then the event is considered to be a corporate action.

Restructuring of Issued Capital – From time to time the issuer may choose to change the quantity of shares issued and/or the par value of those shares, for example by way of share splits or buy-backs. Many reasons exist for restructuring, including: the reduction or increase of the total value of issued capital and the reduction or increase of the current market price of the shares.

Redemption of Debt – In accordance with the terms of individual debt issues, the issuer will redeem the bonds at the maturity date (or prior to the maturity date if the issue terms permit).

Assuming Control of another Organization – One organization, in this case not the issuer, may wish to gain control of (i.e. takeover)another organization in order to : control competition in the same market; control either supplier or distribution networks in the same market; extend or diversify product range or market

Dissemination of Information to Shareholders – The board of directors of an issuer is obliged to inform shareholders of various activities that affect the operation and profitability of the company, and in some cases will also need to seek the shareholders’ approval of such activity before it is undertaken.  Such information includes Notification of company year-end results, Capital investment programmes and Notification of an AGM / EGM.

Life cycle of Corporate  Actions

–          Announcement

–          Event definition

–          Entitled holdings identification

–          Entitlements computation

–          Response capture if voluntary

–          Customer communication

–          Cash / securities settlement

–          Close event

Some Corporate Actions Risk elements are

–          Inadequate Holdings at the time of settlement debit

–          Inadequate Cash at the time of settlement Debit

–          Inadequate Margin in case of leveraged accounts

Corporate Action processing: Challenges

Corporate action processing is an area of significant risk and one of the most manual, complex and challenging parts of back-office operations.  Tight deadlines and conflicting / incomplete information it becomes tougher to handle. It results in a risk of late payment, changes in market price, loss of interest or missed opportunities for financial institutions.

Corporate actions are faced with several major challenges:-

–          Multitude of Sources

–          Obtaining Accurate Information

–          Lack of Uniformity at source

–          Market Conventions

–          Flow of Information

–          Increasing Complex Instruments and Events

–          Using Information for Various Purposes

–          Managing Resources

–          Election Processing

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