Corporate

Actions
[Bonus, Stock Split
and Dividends]

3
 Bonus Issue - Overview
 Issued in a certain proportion only to the existing shareholders.

 Eg : 2:1 bonus shares  If you already own 1 share, you get 2 additional new shares.

 Total holding of shares is now 3 shares instead of 1 share.

 No need to pay any money for these shares.

 Who pays for the Bonus shares?

• Cash lying in free reserves and surplus of the Company  Moved to Capital.

• Addition of fresh Capital  fresh equity shares are issued to eligible equity
shareholders in a specific ratio.

 New shares are issued at the existing Face Value of equity shares of the Company.

 Face value remains the same post bonus issue.

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 Effect of Bonus Issue

Increases
number of
outstanding
equity shares
Reduces share
Reduces per
price in
share ratios
proportion to
(for e.g: EPS,
number of
Book Value per
bonus shares
share, etc.)
issued.
Effects
of Bonus
Issue
Increases
Reduces free
liquidity in
reserves and
equity shares
surplus of the
on the stock
Company.
exchanges

Creates
implicit value
per equity
share

5
 Dividend - Overview
 Dividend = Distribution of certain portion of Company’s profits to its shareholders.

 Dividend pay out ratio = Dividends Paid

Net Earnings

 Net-Profits which aren’t distributed as Dividend =

Put in the Free reserves and surplus of the Company.

 Interim dividend : Given during the year is authorised by the Board of the Company.

 Final dividend : Recommended by Board of the Company.

Approved by its shareholders in the Annual General Meeting (AGM).

6
 Stock Split vs Bonus Shares
Basis Stock Split Bonus Issue
Meaning - Already owned shares split into - Free additional shares given to existing
smaller shares. shareholders based on no. of shares
owned.
Reason - To improve Liquidity by breaking it - To distribute gains of accumulated
into smaller size. earnings without paying cash to the
shareholders.
Face Value (FV) - Reduces in proportion of split ratio. - Remains same.
Share Capital & - No impact. - Reserves reduced.
Reserves - Money moved to Share capital as new
shares are issued.
Impact on future - Reduces in proportion to split ratio. - Remains same.
Dividend
Beneficiaries - Shareholders (as on Record Date). - Shareholders (as on Record Date).

Example Stock Split = 1:10 Bonus issue = 2:1

 Every already owned share is split  Shareholder gets 2 free shares for
into 10 new shares of new FV of 1/10 every 1 share already owned.
of original FV.
 So finally he has 1+2 =3 shares of
same FV as before.

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 Dividend – Important Dates
DATE MEANING

Declaration Date - Date of approval of Dividend Rate (per share) by Board of

Directors of Company.

Record Date - Proposed by Board of Directors to determine name of the eligible

shareholders for dividend.

- All eligible shareholders with their names in the list at the end of
Record Date will be eligible to receive dividends.

- Minimum gap of 5 clear working days needed between Declaration

Date and Record Date.

- Shares credited in Demat account two days after the actual

purchase on Stock Exchange platform.

- To be eligible for receiving dividend: Investors to have shares in

the Demat account by record date.

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 Dividend – Important Dates
DATE MEANING

Cum Dividend Date - Last Date to buy shares in order to be eligible to

receive dividend.

- One-day prior to Ex-Dividend Date.

Ex-Dividend Date - On this day the price of the equity share of the
Company gets adjusted for the dividend pay out.

- Stock exchanges determine and notify this date.

- One working day prior to the Record Date

Payment Date/ Issue - Payment of dividend to be completed within 30 days of
Date its approval.

- Eligible shareholders receive the dividend amount

before this date.

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 Bonus Issue: Impact on Price of Share

 Post Bonus Market Price Pre Bonus Market Price of Share

of Equity Share = Post Bonus Number of Shares (Adjustment Factor)

where
 Bonus Ratio (A:B) {A bonus shares for every B Shares held}

 Adjustment Factor = (A+B) / B

Eg: Market Price of One Equity Share (a) = Rs.15/-

Bonus Ratio (b) = 2:1
Adjustment Factor (c) = 3 {(2+1)/1}
Post Split Market Price (a/c, i.e. 15/3) = Rs.5/- per share

10
 Stock Split: Impact on Price of Share

 Post Split Market Price Pre Split Market Price of Share

of Equity Share = Resultant Final Number of Shares (Adjustment Factor)

where
 Split Ratio (A:B) {A shares for every B Shares held}

 Adjustment Factor = A/B

Eg: Market Price of One Equity Share (a) = Rs.15/-

Stock Split (b) = From Face Value of Rs.10/- to Rs.5/-
Split Ratio (10/5, from “b” above) = 2:1
Adjustment Factor (c) = 2
Post Split Market Price (a/c, i.e. 15/2) = Rs.7.50/- per share
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 Dividend: Impact on Price of Share

Payment of Dividend

- Reduces of Market Price of Share by dividend (w.e.f ex-record date)

- Post Dividend Market Price of Share = Pre Dividend Price – Dividend Amount

Eg: Market Price of One Equity Share (a) = Rs.10/-

Dividend declared per Share (b) = Rs.2/-

Ex-Dividend Market Price per equity share (a – b) = Rs.8/- (10-2)

12
https://zerodha.com/varsity/chapter/five-corporate-actions-and-its-impact-on-sto
ck-prices
/

https://www.livemint.com/
https://
timesofindia.indiatimes.com/business/india-business/airtel-builds-war-chest-a
nnounces-mega-rs-21000-cr-rights-issue/articleshow/85742733.cms

https://
www.businessinsider.in/stock-market/news/infosys-announces-buyback-wort
h-9200-crore-at-1750-per-share/articleshow/82066356.cms

https://
www.business-standard.com/article/markets/eicher-motors-shares-jump-10-a
s-10-for-1-stock-split-comes-into-effect-120082401700_1.html