Corporate actions are also known as corporate exercises.
A corporate action is a process undertaken by a PLC to enrich its capital structure and subsequently the value of the company’s stock. Corporate actions are usually agreed upon by a company’s directors and approved by the shareholders at an AGM or EGM.
There are different types of corporate actions, and each can have an impact on the price of a share. Therefore, it is critical to know what each corporate action means to help you in your trading decisions.
Three points you need to know are:
1. Is the corporate action a subscription, whereby you can choose to accept what is offered, or a free entitlement, where the corporate action is automatically effected through the shares you are holding.
2. What is the ratio proposed under the corporate action, which determines how many new shares you will receive for the existing shares held.
3. The impact of the corporate action on the price and number of shares, which will ultimately impact on your portfolio value.
However, this article will only look at the free entitlement type of corporate action.
1. Bonus Issues
A PLC can issue additional shares to shareholders in proportion to their existing shareholding. These are made on ratios such as 1:2 or 1:3 to increase the number of shares held by a shareholder. If the ratio is 1:2 (one-for-two), you will get one new share for every two shares you hold.
XXX Resources Bhd, a main board listed industrial company made a one-for-two (1:2) bonus issue to shareholders. This means, for every two XXX shares held, you’d get an additional share, bringing the total to three shares.
However, there is a corresponding effect on the share price which typically goes down after a bonus issue, before market forces determine the price thereafter. The net effect from the bonus issue will depend on the price of the share after the bonus issue, multiplied by the number of increased shares you now hold.
2. Share Splits
When a PLC feels that its share price is too high and wants it to be more attractive to a wider pool of investors, the company would split the shares to increase the number of outstanding shares in the market while ensuring the paid-up capital remains the same. The resulting increase in available shares will make the stock more affordable to interested buyers. Shares are usually split by ratios such as 2:1 or 5:1.
XXX BHD Recently did a share split of five-for-one (5:1). This means that one XXX share will now become five shares. Of course, the price changes as well! If the pre-split price was RM5, then the price after the split will be RM1 before market forces determine the price.
3. Share Consolidation
This is exactly opposite of a share split. Share consolidation means that each share is replaced with a smaller number of shares with a higher par value. A two-to-one (2:1) share consolidation means that if you currently hold two shares with a par value of 50 sen, then after the 2:1 share consolidation, you will now have one share with a par value of RM1.
When PLCs make good profit, they may decide to pay a portion of that income to shareholders in the form of a dividend.
When a dividend is issued, the equity of the company can be affected because the distributable equity has been reduced. Let’s say you hold 100 shares of a certain PLC, and the company decides to pay a 50 sen dividend, you will then receive RM50 as dividend based on the 100 shares you hold.
Dividend distribution will have a criteria, you need purchased the share and hold to a date, then you are entitled for the dividend. It is called EX date. BUT there is an important notice need to be aware, on EX date, the dividend (RM 0.50) will be deduct from your SHARE PRICE!
If the share is RM 2, on Ex- date, share price will be open at market by RM 1.50. if the share price does not move for long period, you are not taking any granted from the dividend, because your share price is deduct by 50 sen as well! A lot investor make a lot mistake, by ex-date to sell the share, they are not gaining any profit.
Announcement date: When a company plans a corporate action, it will first make an announcement to its shareholders. The announcement will highlight what the corporate action is all about, and when it will take place.
As a well-informed investor, you should take note of the announcement. Check the company website for further details or visit the Bursa Malaysia website which will also give general details on the corporate action to be undertaken.
Cum date: Cum date is the last date the particular stock is traded at market price before the corporate action takes effect. What this means is, you will be able to buy and sell the particular stock based on the market price until the cum date.
The corporate action will take effect the next day, so there would be an impact on the price of the share the next day.
Ex-date: This is the date when the stock price reflects the adjustment made after undergoing certain corporate actions.
To receive the necessary entitlements through corporate actions, you must purchase the stock before the ex-date. If you purchase a stock on or after the ex-date, you will not receive the entitlements.
Book closing date (BCD): A cut-off date is implemented so that the final shareholders of the particular stock can be identified to ensure they receive the necessary entitlements from the corporate action.
For example, if a company announces book closure date to be Dec 1, 2007, then those who own the stock as of Dec 1, 2007 will be entitled to the dividend/bonus/split benefit.
Payment date: This is the date on which a declared stock dividend is scheduled for payment. Only shareholders who bought the stock before the ex-date will receive the dividend on the date of payment.
Let’s look at a corporate action undertaken by Mesdaq-listed My E.G. Services Bhd (MYEG). This company sought to issue a one-for-one (1:1) bonus issue to its shareholders on Nov 19, 2007. As required, it made the necessary announcements prior to the corporate action on Oct 31, 2007.
As the company intended to list the bonus shares on Nov 19, 2007, it announced Nov 16, 2007 as the book closing date (BCD).
MYEG then set the ex-date on Nov 14, 2007 or two market days prior to the BCD. Thus, to be entitled for the bonus issue, you must buy MYEG shares before the end of trading on Nov 13, 2007 or the cum date.
For example, if you had purchased 100 shares in MYEG on cum basis on Nov 13, 2007, you will receive an additional 100 shares when the market closed on Nov 16, 2007.
As a result of the bonus issue, 200 MYEG shares will now reside in your CDS account on the night of Nov 16, 2007 being the BCD.
Investors who are entitled to receive MYEG bonus issue shares may sell any or all of their MYEG shares arising from the bonus issue beginning the ex-date (Nov 14).
In the market, timing is important, but information is crucial. Happy investing!