Lesson 11 of 13 · Free
Contents
Corporate Actions
Dividends, bonus, split, rights, buyback. What each does mechanically to your holding and how stock prices react.
What corporate actions are
A corporate action is anything the company does that affects shareholders’ holdings — dividends, splits, bonuses, rights issues, buybacks, mergers, demergers, name changes, face-value changes. Each one mechanically changes either the number of shares you hold, the price per share, or the cash in your bank account. None of them change the underlying value of your position on day one — only the way that value is sliced.
Understanding corporate actions matters because they affect cost basis, taxes, and how you read historical price charts. A stock that “fell 50% overnight” might just have done a 2-for-1 split.
Dividends
A dividend is cash the company pays to shareholders out of profits (or sometimes reserves). Typically declared quarterly or annually, expressed as ₹X per share or X% of face value.
Example: TCS declares ₹73 final dividend. If you hold 100 shares on the record date, ₹7,300 lands in your bank within a few weeks.
Mechanics on the ex-dividend date:
- Stock price drops by approximately the dividend amount at market open. If TCS was ₹4,000 before, it opens around ₹3,927 ex-dividend. The economic value of your holding is unchanged — you give up ₹73 of stock price for ₹73 cash.
- Tax: dividends are taxable in shareholder’s hands as per slab rates (since FY 2020-21).
Bonus issues
A bonus issue gives existing shareholders extra shares for free, from the company’s reserves. A “1:1 bonus” doubles your holding without you paying anything.
Example: Wipro announces 1:1 bonus. If you hold 100 shares at ₹500, after the ex-bonus date you hold 200 shares at approximately ₹250. Total value unchanged.
Bonus issues are popular for two reasons. They make the share visually more affordable (₹250 looks easier to buy than ₹500), and they signal management confidence — companies bonus when retained earnings have built up nicely.
Stock splits
A split divides the face value of the share into smaller units. A ₹10 face value share split 1:5 becomes a ₹2 face value share, and your 100 shares become 500.
Bonus vs. split: economically identical at the price level. The accounting differs — bonus moves money from reserves to share capital; split just changes face value without touching reserves. Both are cosmetic.
Rights issues
The company offers existing shareholders the right to buy more shares at a discount to the current market price. Each share you hold gives you the right to apply for a defined ratio (e.g., 1 new share for every 4 held) at the rights price.
You have three options:
- Subscribe. Pay the rights price and get the new shares. Increases your stake in the company.
- Renounce. Sell your rights entitlement in the market. The right itself trades for a few days.
- Let it lapse. Do nothing. Your stake gets diluted as others subscribe and the company issues new shares.
Rights issues happen when companies need new capital but want to give existing shareholders first refusal. Often viewed less favourably than QIPs because they signal the company couldn’t (or wouldn’t) raise from institutions.
Buybacks
The opposite of an issue. The company buys back its own shares from the open market or via a tender offer, reducing total shares outstanding. This boosts EPS (same profit ÷ fewer shares) and signals management confidence.
Two methods in India:
- Tender offer — company announces a price; shareholders tender shares for buyback at that price. Pro-rata allotment if oversubscribed.
- Open market buyback — company buys at market price over a defined window. Less aggressive on price impact.
Tata Consultancy Services and Infosys have done multiple buybacks. The tender-offer route generally returns more cash to participating shareholders because the buyback price is typically above market.
The dates you need to know
- Announcement date. Company tells the market a corporate action is coming.
- Record date. The cut-off — shareholders on the books on this date are entitled. Shares bought one day before the record date qualify (because of T+1 settlement).
- Ex-date. The date the stock starts trading without the entitlement. Usually one trading day before the record date.
- Pay date. When dividend cash lands in your account. Typically 7-30 days after the record date.
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Corporate actions are events initiated by listed companies that affect the security or shareholder. They have specific record dates and tax implications. Knowing the difference between them helps you avoid double-counting returns or missing entitlements.
| Action | What happens | Tax treatment |
|---|---|---|
| Cash Dividend | Cash credited to bank A/c | Taxable at slab rate; TDS 10% if exceeds ₹5,000/yr |
| Bonus Issue | Free additional shares (e.g., 1:1) | No tax event; cost basis spreads across more shares |
| Stock Split | Face value reduction; more shares at proportionately lower price | No tax event; helps liquidity |
| Rights Issue | Right to buy more shares at discount to market | If exercised, becomes new investment; if sold, capital gains apply |
| Buyback | Company repurchases shares (tender or open market) | Taxed in shareholder hands as dividend (post Oct 2024) |
| Demerger | Spin-off into separate listed entity | Cost basis allocated proportionally; no tax event |
| Merger | Combination with another listed entity | Tax-neutral if SEBI-approved scheme; share swap ratio matters |
Worked Example: Bonus Issue Cost Basis
Suppose you hold 100 shares of Infosys bought at ₹1,500 each (total cost ₹1,50,000). Infosys announces 1:1 bonus. Post-bonus you hold 200 shares but your original cost basis remains ₹1,50,000 — so per-share cost becomes ₹750. The market price typically adjusts to ~₹750 the next trading day (the ex-bonus date). You have neither gained nor lost wealth; you simply hold the same total value across more shares. Where the bonus matters: when you sell, capital-gains tax is computed on the ₹750 cost basis, often leading to higher per-trade gains than the pre-bonus cost.
FAQs — Corporate Action Mechanics
Record date vs ex-date — which matters?
To receive the corporate action benefit, you must be holding the share on the record date. The ex-date is one day before the record date — buy on or before ex-date to be in the book. After ex-date, you don’t qualify even if you buy on the same day.
Why does the share price fall on ex-dividend date?
The value of the dividend is mechanically removed from the share price. If ITC pays ₹15 dividend, the ex-date price typically drops ~₹15. Net wealth to you is unchanged (cash + lower-priced share = same total).
Should I participate in a tender-route buyback?
If the buyback price is at a meaningful premium to market (15%+) and the acceptance ratio is reasonable (40%+), yes. Post Oct 2024, buyback proceeds are taxable as dividend at slab rate, which has reduced the attractiveness for high-tax-bracket investors.
Special Situation: Demergers and Value Discovery
Indian demergers are often value-discovery events. When a conglomerate spins off a non-core business, the listed parent and the new entity together can be worth 20-30% more than the pre-demerger combined entity. Recent examples: ITC Hotels demerger (2024) crystallised value for the hotels business worth ~₹15,000 crore separately; Jio Financial Services spin-off from Reliance (2023) was listed at ₹262 and now trades around ₹305; the Adani Wilmar IPO carved-out value previously hidden in Adani Enterprises. Holding the original parent through the demerger record date entitles you to shares in both entities; the new entity typically lists 60-90 days later. From a tax perspective, demergers under Section 2(19AA) and 47(vib) of the Income-tax Act are tax-neutral provided the SEBI-approved scheme is in place — cost basis simply allocates between the parent and the spin-off pro-rata to net-worth split disclosed in the scheme document.
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