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Corporate Actions - Meaning & Taxation

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Yesha Dalwadi

Corporate Actions
Income Tax

When a company issues a corporate action, it has a direct effect on the securities issued by that company. If an individual holds stocks in such a company or is a potential investor then it becomes essential to understand how will a corporate action affect the company. This article will give a clearer idea of some common types of corporate actions and how they can affect shareholders.

What is Corporate Action?

A corporate action is an activity that brings material change to an organization and impacts its stakeholders that includes the shareholders of the firm. A corporate action is initiated by the board of directors and approved by the shareholder of the firm.

Common Type of Corporate Actions

For Equity Shareholders

‌Buy Back of Shares

‌A buyback is a company’s method to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. However, the buyback of shares is an important corporate restructuring method.‌

The company buys back shares from existing shareholders at an issue price. Thus, an existing shareholder sells shares to the company at the issue price.‌

Example:

Listed company ABC Ltd repurchased 1,000 shares at the market price of Rs. 700 and issue price of Rs 100.‌

Tax Treatment

‌Dividend

‌A dividend payout is when the company shares its profit with the shareholders. It can be in the form of cash or stock, which is issued at a specified interval of time i.e. quarterly, semi-annually, or yearly.‌

Tax Treatment

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Dividend on Preference Shares

Dividend on preference shares is the dividend distributed by a Company on each preference share held by the investor. ‌

Tax Treatment

Amalgamation

An amalgamation is the combination of two or more companies into a larger single company.‌

Example:‌

Under the Merger of IDFC Bank and Capital First, Akash had purchased 10 shares of Capital First in 2011 and is still holding the stock. The companies have agreed to a swap ratio of 139:10. Hence, Akash will get 139 shares of IDFC Bank in exchange for his 10 Capital First shares.‌

Tax Treatment

Issue of new shares in exchange for old shares is not treated as a transfer and is thus not taxable.‌

Bonus Issue

Company issues Bonus Shares to existing shareholders as an alternative to paying dividends. The company issues bonus shares to existing shareholders as on record date in a decided ratio‌.

Example:

Listed company ABC Ltd announces bonus issue of shares of 1:5. Thus, a shareholder will receive 5 new shares for each share held.‌

Tax Treatment

Right Issue of Equity Shares

With an objective to raise fresh capital, company offers right shares to existing shareholders as on record date in a decided ratio.‌

Example:

Listed company XYZ Ltd announces a right issue of shares of 1:5 at an issue price of INR 200 with a market price of INR 350. Thus, a shareholder can buy 5 new shares at INR 200 for each share held.‌

Tax Treatment

Spin Off

Spinoff refers to the dissolution of a subsidiary business entity from its parent company to form a new smaller independent organization. In a spinoff, a particular section of the parent company is separated from the main business. The spun-off company gets its own unique identity different from the parent company. In a spinoff, the existing shareholders of the parent company receive shares of the spin-off company as special dividends.‌

Example:‌

Shareholder has 100 shares of company A, Rs10 per share. Company A spins-off one of its divisions into Company B. Company A says that for each 10 shares of Company A that you own, you will be given 3 shares in Company B. It also says that Company B made up 30% of its total value so the value of Company A’s shares will be reduced by 30%.‌

Company A’s value becomes 700 post reduction and also gets Company B’s 30 shares (300 value) leading up to 1,000 (original value)‌

Tax Treatment

Stock Split

Stock Split is a division in the shares of the company thus increasing the number of shares keeping the market cap the same.‌

Example:

Listed company XYA Ltd announces a stock split from INR 10 face value to INR 2 face value. Thus, a shareholder having one share of INR 10 face value would now hold 5 shares of INR 2 face value.‌

Tax Treatment

FAQs

How will I know about any corporate action taken by the company?

The companies always communicate any corporate actions that they have taken to their shareholders. If one is not a shareholder, one can visit the official websites of NSE and BSE, and look at corporate announcements.

What is the meaning of voluntary and mandatory corporate action?

In a voluntary corporate action, shareholders have the choice to participate or not to. In a mandatory corporate action, shareholders have to compulsorily participate.

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