What are corporate actions?
Corporate actions (CAs) are organized events which gets decided in a company’s annual general meeting before announced through a stock exchange. These events often bring material changes to a company through changes in the capital structure and economic benefits to investors.
Listed companies announce corporate actions on its issued securities (equity/debt). A few reasons companies perform corporate actions are:
- Distribution of profits to shareholders (dividends)
- Making share prices more affordable to small investors by announcing stock splits and reverse stock splits
- Restructuring in order to focus on its core competencies (spinoffs and merger CA events)
Types of corporate action events
As the name suggests, these events are compulsory and don’t require approval from shareholders. The company declares mandatory corporate actions, and based on positions maintained as on the record date, the entitlement gets credited to the shareholders’ accounts on the pay date of the event. Under mandatory events we have bonus and transformation events.
Bonus events: Under this CA, additional entitlements are credited to the shareholder over and above their original holdings. Additional entitlements are calculated as per a predefined ratio based on the original holding.
Transformation events: Under this CA, the original position on underlying stock will be removed and new positions will be setup under a new ISIN. The quantity of new holdings depend on the original holdings of the shares.
Mandatory with choice event
These are compulsory CA events as well. However, shareholders are given a choice to elect either stock or cash on/before the deadline date of corporate event. Cash will be considered by default if shareholders doesn’t confirm their choice before the deadline. Dividend re-investment plans (DRIPs) are usually practiced in Australia and New Zealand markets. Similarly, stock cash option events are followed in APAC markets (Hongkong, Singapore, Malaysia).
These are optional events where the shareholders must make a decision on/before the deadline date. Shareholders who fail to instruct on the deadline will not be entitled to participate in the announced event such as rights issue, tender offer, and buy back offer.
Corporate actions processing team ensures complete instructions are collected for voluntary events, from event announcement to event distribution
Flow of corporate actions
Corporate action markets
APAC- APAC markets are usually plain markets. Japan, Hong Kong, Taiwan, Korea, etc., are parts of these markets. Each market has different logistics related to corporate action events. In Japanese markets, dividends are announced every quarter. Taiwanese markets have withholding tax (WHT) on dividends announced.
EMEA- EMEA markets are usually complex and a huge volume of trades happen while processing corporate actions. Few critical markets include Spain, France, Sweden, and Italy. The dividends team ensures that all outstanding trades are settled and that there are no outstanding positions before the record date.
The US- DTC is used to verify upcoming corporate actions. DTC works with issuers and their authorized agents to announce CA events in a timely manner. DTC is re-engineering technology with the introduction of XBRL (eXtensible Business Reporting Language). XBRL messages will help retrieval of CA data directly from issuers which will help reduce CA cost, risk, and expedite the events announcement in the market.
Corporate actions processing
Notification: The CA team will collect valid information on the event and ensure that details such as ex-date, record date, pay date, and payout ratios are accurate. The data scrubbing team plays an important role here in providing true event information. Whenever information on key dates are not clear, the CA team will directly contact agent to confirm event details.
Entitlement and reconciliation: The corporate actions team will reconcile positions with the custodian. The team will then calculate entitlements and debit/credit shares in the trader’s account for respective long/short positions held as on the ex-date.
Instruction: Considering timelines are competitive in the marketplace, CA teams will ensure all instructions and liabilities are actioned prior to deadlines.
Payment: As a part of the pay-date activity, the CA event processor will book the outturn of event into the settlement system, settle trades, ensure that all shares are received in the account, reconciled, and will finally confirm all outstanding claims with counterparties.
Differences between stock dividend and stock split
Though the processing steps are the same, they are different corporate actions. Stock dividend entails the capitalization of reserves. In case of stock split, par value of existing share is reduced, and the number of shares will increase proportionately. However, issued capital will remain unchanged. Companies generally go for a split when the share price becomes too high, and goes out of reach for small and medium investors. So, in order to attract investor attention, companies announce a stock split event.
Key Dividend Entitlement- Dates
- On ex-dividend date, the shares will begin to trade ex-dividend. Therefore, buyers of shares on or after the ex-dividend date will not be eligible for the upcoming dividend.
- On the ex-dividend date, the share price will decline by the amount of dividend. For e.g., if the cum-dividend price is $50 per share and divided is $2 per share, then the share should trade at $48 ex-dividend.
CA SWIFT messages
- The MT 564 swift message will have details about ex-dividend, record date, pay date, and payout ratio. Payout ratio will be mentioned as n:1, that means ‘n’ new shares will be issued to an existing shareholder for every old share that he is holding. E.g., an 11:10 split means that a holder of 10 existing shares will receive 11 shares.
- Any event which carries additional details about the corporate action event will get captured in an MT 568 message.
- Once the CA event gets paid in the market, the agent will release an MT 566 swift message. Business SMEs will check the MT 566, and accordingly, will process the CA event.
- Once the events are processed in CA applications, the SMEs will match the system entries with the agent position on the following day in the recon tool.
Impact of corporate actions in the company’s balance sheet
Cash dividend: It effects equity by reducing retained earnings. The company’s cash account will reduce on the asset side and retained earnings will decrease on the equity side of liabilities.
Bond issue: Issuing a bond adds a liability and adds cash on the asset side. Overall, the company’s balance sheet will increase in both sides.
Stock dividend: It decreases the company’s retained earnings and increases common stock.
Few scenarios to consider
The impact of COVID-19 on CA events
Due to the global crisis situation because of COVID-19, we may see an impact on the world of corporate actions as well. There are talks that corporate action events are likely to be cancelled in some markets before the distribution/payment date. This means shareholders might not receive dividends in the coming quarters. If share price continues to fall, the shareholder might sell the position in market which will further raise liquidity crunch in global markets.
Another issue of concern is the spike in the number of credit alert counterparties. Due to the ongoing pandemic situation, there have been chances of web fraud resulting in companies being categorized as credit alert risks.
In order to maintain reserves and surplus, companies, for sure, might not announce/distribute cash dividends in the coming quarters. Investors will have to remain patient in these difficult times and wait for the right opportunity to buy/sell positions.