8. MISCELLANEOUS

8. MISCELLANEOUS
8.1 Corporate Actions
What are Corporate Actions?
Corporate actions tend to have a bearing on the price of a security. When a
company announces a corporate action, it is initiating a process that will
bring actual change to its securities either in terms of number of shares
increasing in the hands on the shareholders or a change to the face value of
the security or receiving shares of a new company by the shareholders as in
the case of merger or acquisition etc. By understanding these different types
of processes and their effects, an investor can have a clearer picture of what
a corporate action indicates about a company's financial affairs and how that
action will influence the company's share price and performance.
Corporate actions are typically agreed upon by a company's Board of
Directors and authorized by the shareholders. Some examples are
dividends, stock splits, rights issues, bonus issues etc.
What is meant by ‘Dividend’ declared by companies?
Returns received by investors in equities come in two forms a) growth in the
value (market price) of the share and b) dividends. Dividend is distribution
of part of a company's earnings to shareholders, usually twice a year in the
form of a final dividend and an interim dividend. Dividend is therefore a
source of income for the shareholder. Normally, the dividend is expressed
on a 'per share' basis, for instance – Rs. 3 per share. This makes it easy to
see how much of the company's profits are being paid out, and how much
are being retained by the company to plough back into the business. So a
company that has earnings per share in the year of Rs. 6 and pays out Rs. 3
per share as a dividend is passing half of its profits on to shareholders and
retaining the other half. Directors of a company have discretion as to how
much of a dividend to declare or whether they should pay any dividend at
all.
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What is meant by Dividend yield?
Dividend yield gives the relationship between the current price of a stock
and the dividend paid by its’ issuing company during the last 12 months. It
is calculated by aggregating past year's dividend and dividing it by the
current stock price.
Example:
ABC Co.
Share price: Rs. 360
Annual dividend: Rs. 10
Dividend yield: 2.77% (10/360)
Historically, a higher dividend yield has been considered to be desirable
among investors. A high dividend yield is considered to be evidence that a
stock is underpriced, whereas a low dividend yield is considered evidence
that the stock is overpriced. A note of caution here though. There have been
companies in the past which had a record of high dividend yield, only to go
bust in later years. Dividend yield therefore can be only one of the factors in
determining future performance of a company.
What is a Stock Split?
A stock split is a corporate action which splits the existing shares of a
particular face value into smaller denominations so that the number of
shares increase, however, the market capitalization or the value of shares
held by the investors post split remains the same as that before the split.
For e.g. If a company has issued 1,00,00,000 shares with a face value of Rs.
10 and the current market price being Rs. 100, a 2-for-1 stock split would
reduce the face value of the shares to 5 and increase the number of the
company’s outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)).
Consequently, the share price would also halve to Rs. 50 so that the market
capitalization or the value shares held by an investor remains unchanged. It
is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; the
value remains the same .
Let us see the impact of this on the share holder: - Let's say company ABC
is trading at Rs. 40 and has 100 million shares issued, which gives it a
market capitalization of Rs. 4000 million (Rs. 40 x 100 million shares). An
investor holds 400 shares of the company valued at Rs. 16,000. The
company then decides to implement a 4-for-1 stock split (i.e. a shareholder
holding 1 share, will now hold 4 shares). For each share shareholders
currently own, they receive three additional shares. The investor will
therefore hold 1600 shares. So the investor gains 3 additional shares for
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each share held. But this does not impact the value of the shares held by
the investor since post split, the price of the stock is also split by 25%
(1/4th), from Rs. 40 to Rs.10, therefore the investor continues to hold Rs.
16,000 worth of shares. Notice that the market capitalization stays the same
- it has increased the amount of stocks outstanding to 400 million while
simultaneously reducing the stock price by 25% to Rs. 10 for a capitalization
of Rs. 4000 million. The true value of the company hasn't changed.
An easy way to determine the new stock price is to divide the previous stock
price by the split ratio. In the case of our example, divide Rs. 40 by 4 and
we get the new trading price of Rs. 10. If a stock were to split 3-for-2, we'd
do the same thing: 40/(3/2) = 40/1.5 = Rs. 26.60.
Pre-Split Post-Split
2-for-1 Split
No. of shares 100 mill. 200 mill.
Share Price Rs. 40 Rs. 20
Market Cap. Rs. 4000 mill. Rs. 4000 mill.
4-for-1
No. of shares 100 mill. 400 mill.
Share Price Rs. 40 Rs. 10
Market Cap. Rs. 4000 mill. Rs. 4000 mill.
Why do companies announce Stock Split?
If the value of the stock doesn't change, what motivates a company to split
its stock? Though there are no theoretical reasons in financial literature to
indicate the need for a stock split, generally, there are mainly two important
reasons. As the price of a security gets higher and higher, some investors
may feel the price is too high for them to buy, or small investors may feel it
is unaffordable. Splitting the stock brings the share price down to a more
"attractive" level. In our earlier example to buy 1 share of company ABC you
need Rs. 40 pre-split, but after the stock split the same number of shares
can be bought for Rs.10, making it attractive for more investors to buy the
share. This leads us to the second reason. Splitting a stock may lead to
increase in the stock's liquidity, since more investors are able to afford the
share and the total outstanding shares of the company have also increased
in the market.
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What is Buyback of Shares?
A buyback can be seen as a method for company to invest in itself by buying
shares from other investors in the market. Buybacks reduce the number of
shares outstanding in the market. Buy back is done by the company with
the purpose to improve the liquidity in its shares and enhance the
shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulation,
1998, a company is permitted to buy back its share from:
a) Existing shareholders on a proportionate basis through the offer
document.
b) Open market through stock exchanges using book building process.
c) Shareholders holding odd lot shares.
The company has to disclose the pre and post-buyback holding of the
promoters. To ensure completion of the buyback process speedily, the
regulations have stipulated time limit for each step. For example, in the
cases of purchases through stoc k exchanges, an offer for buy back should
not remain open for more than 30 days. The verification of shares received
in buy back has to be completed within 15 days of the closure of the offer.
The payments for accepted securities has to be made within 7 days of the
completion of verification and bought back shares have to be extinguished
within 7 days of the date of the payment.
8.2 Index
What is the Nifty index?
S&P CNX Nifty (Nifty), is a scientifically developed, 50 stock index, reflecting
accurately the market movement of the Indian markets. It comprises of
some of the largest and most liquid stocks traded on the NSE. It is
maintained by India Index Services & Products Ltd. (IISL), which is a joint
venture between NSE and CRISIL. The index has been co-branded by
Standard & Poor’s (S&P). Nifty is the barometer of the Indian markets.
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8.3 Clearing & Settlement and Redressal
What is a Clearing Corporation?
A Clearing Corporation is a part of an exchange or a separate entity and
performs three functions, namely, it clears and settles all transactions, i.e.
completes the process of receiving and delivering shares/funds to the buyers
and sellers in the market, it provides financial guarantee for all transactions
executed on the exchange and provides risk management functions.
National Securities Clearing Corporation (NSCCL), a 100% subsidiary of
NSE, performs the role of a Clearing Corporation for transactions executed
on the NSE.
What is Rolling Settlement?
Under rolling settlement all open positions at the end of the day mandatorily
result in payment/ delivery ‘n’ days later. Currently trades in rolling
settlement are settled on T+2 basis where T is the trade day. For example,
a trade executed on Monday is mandatorily settled by Wednesday
(considering two working days from the trade day). The funds and securities
pay-in and pay-out are carried out on T+2 days.
What is Pay-in and Pay-out?
Pay-in day is the day when the securities sold are delivered to the exchange
by the sellers and funds for the securities purchased are made available to
the exchange by the buyers.
Pay-out day is the day the securities purchased are delivered to the buyers
and the funds for the securities sold are given to the sellers by the
exchange.
At present the pay-in and pay-out happens on the 2nd working day after the
trade is executed on the stock exchange.
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What is an Auction?
On account of non-delivery of securities by the trading member on the payin
day, the securities are put up for auction by the Exchange. This ensures
that the buying trading member receives the securities. The Exchange
purchases the requisite quantity in auction market and gives them to the
buying trading member.
What is a Book-closure/Record date?
Book closure and record date help a company determine exactly the
shareholders of a company as on a given date. Book closure refers to the
closing of the register of the names of investors in the records of a
company. Companies announce book closure dates from time to time. The
benefits of dividends, bonus issues, rights issue accrue to investors whose
name appears on the company's records as on a given date which is known
as the record date and is declared in advance by the company so that
buyers have enough time to buy the shares, get them registered in the
books of the company and become entitled for the benefits such as bonus,
rights, dividends etc. With the depositories now in place, the buyers need
not send shares physically to the companies for registration. This is taken
care by the depository since they have the records of investor holdings as
on a particular date electronically with them.
What is a No-delivery period?
Whenever a company announces a book closure or record date, the
exchange sets up a no-delivery period for that security. During this period
only trading is permitted in the security. However, these trades are settled
only after the no-delivery period is over. This is done to ensure that
investor's entitlement for the corporate benefit is clearly determined.
What is an Ex-dividend date?
The date on or after which a security begins trading without the dividend
included in the price, i.e. buyers of the shares will no longer be entitled for
the dividend which has been declared recently by the company, in case they
buy on or after the ex-dividend date.
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What is an Ex-date?
The first day of the no-delivery period is the ex-date. If there is any
corporate benefits such as rights, bonus, dividend announced for which book
closure/record date is fixed, the buyer of the shares on or after the ex-date
will not be eligible for the benefits.
What recourses are available to investor/client for redressing
his grievances?
You can lodge complaint with the Investor Grievances Cell (IGC) of the
Exchange against brokers on certain trade disputes or non-receipt of
payment/securities. IGC takes up complaints in respect of trades executed
on the NSE, through the NSE trading member or SEBI registered sub-broker
of a NSE trading member and trades pertaining to companies traded on
NSE.
What is Arbitration?
Arbitration is an alternative dispute resolution mechanism provided by a
stock exchange for resolving disputes between the trading members and
their clients in respect of trades done on the exchange. If no amicable
settlement could be reached through the normal grievance redressal
mechanism of the stock exchange, then you can make application for
reference to Arbitration under the Bye-Laws of the concerned Stock
exchange.
What is an Investor Protection Fund?
Investor Protection Fund (IPF) is maintained by NSE to make good investor
claims, which may arise out of non-settlement of obligations by the trading
member, who has been declared a defaulter, in respect of trades executed
on the Exchange. The IPF is utilised to settle claims of such investors where
the trading member through whom the investor has dealt has been declared
a defaulter. Payments out of the IPF may include claims arising of non
payment/non receipt of securities by the investor from the trading member
who has been declared a defaulter. The maximum amount of claim payable
from the IPF to the investor (where the trading member through whom the
investor has dealt is declared a defaulter) is Rs. 10 lakh.