Chapter 8
Q1. 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. Some examples of corporate actions are dividends, stock splits, rights issues, bonus
issues etc.
Q2. What is meant by ‘Dividend’ declared by companies?
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.
Dividend is expressed on a ‘per share’ basis. For instance - Rs.3 per share.
Q3. What is meant by Dividend yield?
It shows 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)
A higher dividend yield has been considered to be desirable among investors.
A high dividend yield indicates stock is underpriced. A low dividend yield indicates the stock is
overpriced.
[Link] 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. The
true value of the company doesn’t change.
For example : If the decides to implement a 2-for-l stock split (i.e. a shareholder holding 1 share, will
now hold 4 shares)
2-for-1 Split Pre-Split Post-Split
No. of shares 100 mill. 200 mill.
Share Price Rs. 40 Rs. 20
Market Cap. Rs. 4000 mill. Rs. 4000 mill
Impact on investor: So the investor gains 1 additional shares for each share held. But this does not
impact the value of the shares the held by the investor since post split, the price of the stock is also
split.
[Link] do companies announce Stock Split?
Two important reasons are:
1) 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. So in a company with 2 for 1stock split , the price of share which
was Rs 40 per share for 100 million share pre split will change to Rs 20 pershare for 200 million share
post split.
2) 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.
Q6. 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 formalities company has to do:
The company has to disclose the pre and post-buyback holding of the promoters.
In the cases of purchases through stock 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.
Bought back shares have to be extinguished within 7 days of the date of the payment.
Q7. What is the Nifty index?
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 group company
of NSE.
Q8,. What is a Clearing Corporation?
A Clearing Corporation is a part of an exchange or a separate entity and performs three functions
1) 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.
2) it provides financial guarantee for all transactions executed on the exchange provides risk
management functions.
3) It provides risk management functions.
National Securities Clearing Corporation Limited (NSCCL), a 100% subsidiary of NSE,
performs the role of a Clearing Corporation for transactions executed on the NSE
Q9. What is Rolling Settlement?
Under rolling settlement all open positions at the end of the day mandatorily result in payment/
delivery ‘n’ days later. 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.
Q9. 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.
Q10. What is an Auction?
On account of non-delivery of securities by the trading member on the pay-in 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.
Q11. What is a Book-closure/Record date?
Book closure refers to the closing of the register of the names of investors in the records of a
company.
It helps a company determine exactly the shareholders of a company as on a given date
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.
Q12. 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.
Q13. 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.
Q14. 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.
Q15. 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.
Q16. 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, then you can
make application for reference to Arbitration under the Bye-Laws of the concerned stock exchange.
Q17. 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.