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Business News/ Money / How do corporate actions like bonus issues, dividends and stock splits impact your demat account? MintGenie explains
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How do corporate actions like bonus issues, dividends and stock splits impact your demat account? MintGenie explains

A corporate action refers to a strategic decision made by a company that directly impacts the value of its shareholders' investments. Here are some common corporate actions and their potential impacts.

Corporate actions can have various impacts on your demat account, depending on the type of action and your holdings.Premium
Corporate actions can have various impacts on your demat account, depending on the type of action and your holdings.

Mergers, acquisitions, stock splits, dividends, and bonuses have the potential to influence share prices significantly. Market participants and investors must comprehend the interplay between business activities and derivatives markets to effectively manage their positions and anticipate shifts in futures and options markets.

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What are corporate actions?

A corporate action refers to a strategic decision made by a company that directly impacts the value of its shareholders' investments. In essence, it is an event that brings about a notable change within the company, affecting its stakeholders. These actions can take various forms, ranging from monetary, such as dividends, to non-monetary, such as stock splits or rights issues. While certain corporate activities may have a minor impact on stock prices, others, particularly those of significant magnitude, can result in substantial shifts in value.

Read here: What are the latest features available in demat accounts?

What impact do corporate actions have on your demat account?

Corporate actions can have various impacts on your demat account, depending on the type of action and your holdings. Here are some common corporate actions and their potential impacts:

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Dividends: If a company declares dividends, the amount will be credited to your demat account if you hold the stock on the record date. This will increase the cash balance in your account.

Bonus Issue: In a bonus issue, additional shares are allotted to existing shareholders at no cost, based on their current holdings. These bonus shares will be credited to your demat account, increasing the number of shares you hold.

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Stock Splits: In a stock split, the number of shares outstanding increases, and the price per share decreases proportionally. Your holdings will be adjusted accordingly, with the number of shares increasing and the price per share decreasing.

Rights Issue: In a rights issue, existing shareholders are given the opportunity to purchase additional shares at a discounted price. If you choose to exercise your rights, the allotted shares will be credited to your demat account upon payment.

Mergers and Acquisitions: In the case of mergers or acquisitions, where a company is acquired or merged with another entity, your holdings may be affected. You may receive shares of the acquiring company or cash in exchange for your shares in the acquired company.

Read here: Demat Accounts: All you need to know about the charges associated and how to reduce them

Buybacks: In a share buyback, the company repurchases its own shares from the market. If you tender your shares in a buyback offer, the purchased shares will be debited from your demat account, and you will receive the buyback price.

Dividend Reinvestment Plans (DRIPs): Some companies offer DRIPs, allowing shareholders to automatically reinvest dividends to purchase additional shares. If you participate in a DRIP, the purchased shares will be credited to your demat account.

It's important to stay informed about corporate actions affecting your investments and understand their implications. Your broker or depository participant should provide notifications and assist you in managing corporate actions in your demat account.

Read here: How to link a demat account with a trading account?

The essence of any adjustment to corporate actions lies in maintaining the consistency of market participants' positions, particularly on the cum and ex-dates of the corporate action. The goal is to ensure that the overall valuation remains as unchanged as possible. Modifications to parameters such as market lot, base price, and option strike prices will be implemented based on the revised terms.

In some cases, adjustments may necessitate a revision of the contract expiry date, potentially leading to the premature closure of contracts, followed by the trading of updated contracts. The nature of these changes will depend on the type of corporate activity involved. It's important to note that modifications to corporate actions could apply to all open positions, requiring careful consideration and management by market participants.

Read here: How to freeze and unfreeze your demat account?

FAQs

Q: What are corporate actions?

A: Corporate actions are decisions made by a company that can have a direct impact on its shareholders and stakeholders. These actions can include dividends, stock splits, mergers, acquisitions, rights issues, bonus issues, and other significant events that alter the structure or financial position of the company.

Q: Why do companies undertake corporate actions?

A: Companies undertake corporate actions for various reasons, including rewarding shareholders with dividends, adjusting capital structure through stock splits or consolidations, raising capital through rights or bonus issues, expanding through mergers or acquisitions, or optimising shareholder value through buybacks.

Q: How do corporate actions affect shareholders?

A: Corporate actions can impact shareholders in different ways depending on the type of action. For example, dividends provide income to shareholders, stock splits increase the number of shares held but reduce the share price proportionally, mergers and acquisitions can lead to changes in ownership or valuations, and rights or bonus issues offer opportunities for shareholders to purchase additional shares at a discounted price.

Read here: How to manage a demat account efficiently? Here are 5 ways

Q: How are corporate actions communicated to shareholders?

A: Companies typically communicate corporate actions to shareholders through official announcements via press releases, regulatory filings, company websites, and sometimes direct mail or email notifications. Shareholders may also receive information through their brokers or financial advisors.

Q: What should shareholders do in response to corporate actions?

A: Shareholders should carefully review the information provided about corporate actions and consider how they may impact their investment portfolios. Depending on the action, shareholders may need to take action, such as exercising rights or making decisions regarding tender offers. It's important for shareholders to stay informed and consult with financial professionals if necessary.

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Published: 28 Mar 2024, 04:43 PM IST
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