Understanding corporate actions is essential for investors, as these events can reshape the financial profile of a company and significantly affect stock valuation and investor returns.

What is a corporate action?

A corporate action is an event initiated by a public company that brings about a change to its stock. These events can either be agreed upon by the company’s board of directors or authorised by shareholders. In practice, corporate actions cover a broad spectrum of activities – from a simple name change to a complete liquidation of the company.

They can be voluntary, such as when shareholders choose to participate in a buyback, or mandatory, like a stock split that affects all shareholders automatically. These actions are essential mechanisms for companies for a range of reasons, whether it’s to manage and adapt their capital structure to strategic and regulatory shifts, or to communicate with investors.

They can significantly impact a shareholder’s:

• Securities position: Corporate actions such as stock splits or mergers can alter the number and type of securities a shareholder owns.
• Cash position: Events like dividends or cash buybacks directly affect the amount of cash a shareholder receives.
• Market price of the security: Announcements such as mergers or rights issues can lead to significant fluctuations in the stock’s market value.

In many cases, corporate actions are also used to signal confidence to investors, enhance liquidity, or comply with legal and listing requirements. The purpose behind corporate actions typically includes:

• Distribution of income: Companies may issue dividends or other payouts to return profits to shareholders.
• Taking control of another organization: Mergers and acquisitions allow companies to expand operations and market presence.
• Dissemination of information to shareholders: Actions like earnings announcements or annual meetings ensure transparency and compliance.
• Raising of capital: Issuing new shares or bonds helps a company secure funding for growth or operational needs.

Because of their importance, corporate actions must be accurately tracked and interpreted, especially by institutional investors, fund administrators, and other financial professionals. That is where Exchange Data International (EDI) plays a critical role.

Types of Corporate Action Data

The main types of corporate actions are as follows:

Mandatory corporate actions

With mandatory corporate actions, shareholders do not have to act and are affected as beneficiaries enacted by the board of directors.
Examples: dividend, bonus issue, consolidation, subdivision

Static data change events: ISIN, SEDOL, local code change

What is an ISIN?

ISIN, which stands for International Securities Identification Number, is a 12-character alphanumeric code that uniquely identifies a security globally, facilitating clearing, reporting, and settlement of trades. It’s a 12-digit number that is recognized by the International Standards Organization.

Mandatory corporate actions with options

Mandatory options offer shareholders a choice between different options, and they receive a default option if choice is not submitted.

Examples: dividend, takeover

Voluntary corporate actions

Voluntary corporate actions are an activity in which shareholders opt to be participants, and they must respond for the company to move forward with action.

Examples: buyback, entitlement issue, meetings, rights

Most common corporate actions

Dividend – A dividend is a distribution of profits by a corporation to its shareholders. Dividend can be Cash dividend or Stock Dividend or combination of both as well.

Rights issue – A rights issue is an invitation to existing shareholders to purchase additional shares in the company. The Rights are normally underwritten by stockbrokers, Can be taken in full or partial and normally offers a sizable discount to shareholders.

Subdivision (stock split) – A subdivision (stock split) is when a company divides the existing shares of its stock into multiple new shares. Actual value of the company remains unchanged only the number of shares in issues are increased by reducing the share price of the security.

Merger/takeover – A merger is an agreement that joins two existing companies into one new company. Company A and Company B merge together to form a Company C. Company a and Company B cease to exist. Takeover is an agreement where company A takes over the managerial control of company B. Company B can be delisted or continue to exist depending upon the Takeover terms.

Demerger (spin-off) – A demerger (spin-off) is when a corporation creates a separate firm from part of its existing business

Frequently Asked Questions about Corporate Actions

Do I need to do anything when a stock splits?
No action is typically required on your part. In the event of a stock split, your shareholding will automatically be adjusted to reflect the new quantity and price per share, with no change to the total value of your investment.

What happens if I miss a voluntary action?
If a voluntary corporate action deadline is missed, your holdings will remain unchanged. However, you may forfeit any potential benefits associated with the action, such as preferential terms or special offers.

Is IPO a corporate action?
An Initial Public Offering (IPO) is not classified as a corporate action. While it is a significant capital markets event, IPOs pertain to the issuance of new shares and do not directly impact existing shareholders in the same manner as traditional corporate actions.