Dividends, splits, bonus shares and other corporate actions

In simple terms

A corporate action is a decision by a company that changes what its shareholders receive or hold. The common ones are:

• Dividends: paying part of the profit to shareholders in cash.
• Stock splits: dividing each share into several smaller ones.
• Bonus issues: giving existing shareholders extra shares for free.
• Rights issues: offering existing shareholders new shares, usually at a discount.
• Buybacks: the company buying back some of its own shares.

Mergers, demergers and changes of name are corporate actions too. Most of them do not make shareholders richer or poorer on the day they happen. They change how the same value is packaged. Knowing that protects you from some very common misunderstandings.

Dividends: record date and ex-date

When a company declares a dividend, it fixes a record date: the shareholders on its register on that date receive the dividend. Because a share you buy takes time to reach your demat account (until the trade settles), the exchange also announces an ex-date, the first day on which the share trades without the right to the coming dividend.

The practical rule is simple: to receive the dividend, buy before the ex-date. If you buy on or after the ex-date, the seller keeps the dividend. The company's announcement and the exchange's corporate action notice give the exact dates.

On the ex-date the share price usually falls by about the dividend, because that cash is leaving the company and the new buyer will not receive it.

Stock splits

A stock split divides each share into several smaller shares, and divides the face value in the same proportion. A company with a face value of ₹10 might split each share into five shares of ₹2 face value.

Companies often split shares to make the price per share lower, so that it is easier for small investors to buy a few. The business, its profits and its total market capitalisation are unchanged.

Bonus issues

A bonus issue gives shareholders extra shares for free, in a fixed ratio, such as one new share for every share held (1:1). The company pays for them by moving money from its reserves into share capital, an accounting change that takes no cash out of the business. As with a split, the price adjusts and the value of your holding stays the same. The difference is that face value stays unchanged and the number of shares rises.

For tax purposes, the holding period of bonus shares starts on the date they are allotted, not the date you bought the original shares. That matters when you later sell them, because it decides whether the gain is short-term or long-term.

Rights issues

In a rights issue a company raises new money by offering existing shareholders the right to buy new shares, in proportion to what they already hold, usually at a price below the market price. You can take up the offer, sell your entitlement to someone else (renounce it), or do nothing.

Buybacks

In a buyback the company uses its cash to buy some of its own shares, either by inviting shareholders to tender shares at a fixed price or by buying on the exchange over time. The bought shares are cancelled, so each remaining share is a slightly larger slice of the company. Whether a buyback is good for shareholders depends on the price paid: buying back shares for more than they are worth transfers value to the sellers. The tax treatment of buyback proceeds has changed in recent years, so check the current rules before tendering shares.

Why it matters

Corporate actions explain many price moves that look alarming but are not: a share "falling" by the dividend amount on the ex-date, or "crashing" 80% after a 1-into-5 split. They also explain why historical price charts are adjusted after splits and bonuses, so that past prices can be compared fairly. And a few corporate actions, rights issues in particular, need you to act, or you lose value.

Limitations

• Dates, ratios and procedures are set by each company and the exchanges, and announced in their filings. Always check the actual notice.
• The price adjustments shown are what happens with nothing else changing. On a real ex-date, the market also moves on news.
• Tax treatment differs by type of corporate action and changes over time.

Common mistakes

• Buying just before the ex-date to collect a dividend. The price drops by about the dividend, and the dividend is taxed.
• Thinking a split or bonus makes you richer. You own more shares of the same company, at a lower price each.
• Ignoring a rights issue letter. Doing nothing can cost you the value of the rights.
• Reading a split-adjusted price drop as a crash. Check whether a corporate action happened before reacting.

Try it yourself

1. On the NSE or BSE website, open the corporate actions list and find a recent dividend. Note its ex-date and record date.
2. Compare the share's closing price the day before the ex-date with its opening price on the ex-date. How much of the drop was the dividend?
3. Find a recent split or bonus issue and check that the market capitalisation was roughly the same before and after.