NISM RA Chapter 9 — Corporate Actions: dividends, bonus, splits, buybacks and what actually changes

This is my note on Chapter 9 of the NISM-Series-XV Research Analyst workbook — “Corporate Actions.” After the heavyweight financial analysis chapter, this one is a breather at 5 marks. But don’t mistake “lighter” for “easy marks lying around” — this chapter is full of precise ratios, thresholds and time limits, and it hinges on one idea that the exam tests again and again: which corporate actions actually change shareholder wealth, and which only look like they do.

That’s the thread to hold through the whole chapter. Let me start with the framework.

The philosophy — and who’s eligible

Beyond running its business, a company takes several actions with direct implications for stakeholders: sharing surplus as dividend, changing capital structure through fresh issues or buybacks, mergers and acquisitions, restructuring, delisting, raising debt. Where a company has made a public issue, the interest of minority investors must be protected. So corporate actions are regulated by three things together:

• The Companies Act, 2013
• The relevant SEBI regulations
• The terms of the listing agreement with the stock exchange

Every corporate action must follow these — including giving notice to regulators and stakeholders, and meeting the disclosure norms.

Who gets the benefit? Investors whose names appear in the register of members (for physical shares) or in the register of beneficial owners maintained by the depository (for demat shares). To fix this, the company announces a record date or book closure period — whoever is on the records that day is an eligible shareholder for the notice and the benefit.

Dividend

Post-tax profits belong to the shareholders, and a company can do two things with them: retain them for investment in the business, or return them to shareholders. Returning money to all shareholders in equal proportion is declaring a dividend. In practice companies do both — the split between distribution and retention depends on the opportunities for ploughing profits back, the nature of management, shareholder expectations, and ultimately the cash actually available to distribute.

A company may declare interim dividends during the financial year and a final dividend at the end. And a number worth memorising: dividends must be paid within 30 days of declaration.

The rupee-terms rule. SEBI now mandates that listed companies declare dividends in rupees per share, not as a percentage of face value as they used to. The reason is a genuine investor-protection point, and the workbook’s example makes it obvious: if companies A and B both declare a “50% dividend” but A’s face value is ₹2 and B’s is ₹10, A’s investor gets ₹1 while B’s gets ₹5 — same percentage, very different money. So A must now declare “₹1 per share” and B “₹5 per share,” and comparison becomes honest.

Tracking the history: the payout ratio = dividend per share ÷ earnings per share.

Taxation: in India the entire dividend is now taxable in the hands of the shareholder. The company deducts 10% tax (under Section 194 of the IT Act) on dividend income above ₹5,000 while crediting it. And from Assessment Year 2021-22, the domestic company no longer pays dividend distribution tax on dividends it declares, distributes or pays.

Rights Issue

When a company needs additional equity capital it can ask existing shareholders or go to fresh investors. Going to fresh investors dilutes existing holders — the workbook’s arithmetic: a company with 10 lakh shares of ₹10 (₹1 crore paid-up capital) that issues another 10 lakh shares to new investors halves the proportion held by existing shareholders, because paid-up capital has doubled.

To prevent exactly this, the Companies Act requires that a company raising more capital through a share issue must first offer them to existing shareholders — that offer is a rights issue. (This is the workbook’s own sample question 2.)

It’s a choice, not a compulsion. A shareholder can: subscribe, let the entitlement lapse without action, or transfer the entitlement to someone else — for consideration (sell) or without consideration (under love and affection). Transferring is called renunciation of rights. Rights entitlements themselves trade on the stock exchange for a defined period.

Pricing: rights shares are generally offered at a discount to the prevailing market price — and the logic is airtight: if the rights price were above the market price, investors would simply buy from the market instead.

The arithmetic: shareholder A holds 10 shares of a ₹100 stock. The company announces a 1-for-2 rights issue at ₹70 — one share for every two held, at ₹70. A can therefore buy 5 more shares at ₹70. In practice companies let shareholders apply for additional shares beyond entitlement, because some holders neither apply nor renounce, leaving shares available.

The process rules (memorise the numbers): a listed company making a rights issue must fix a record date; issue a letter of offer stating details including the purpose of the funds; file the draft letter of offer with SEBI; dispatch an abridged letter of offer at least 3 days before the issue opens; and investors may apply on plain paper if they don’t receive the form. The issue stays open minimum 15 days, maximum 30 days.

The balance sheet effect: outstanding shares rise, with a corresponding increase in cash on the asset side. If all shareholders subscribe fully, their proportionate ownership is unchanged and only their share count rises.

Bonus Issue

A bonus issue (also called a stock dividend or equity dividend) is an alternative to a cash dividend. Bonus shares go to existing shareholders without any consideration — the reserves in the books (which are shareholders’ money anyway) simply get transferred to paid-up/subscribed capital.

The key sentence of the whole chapter sits here: shareholders pay nothing, there is no change in the value of their holdings pre- and post-bonus, and the issuance is “more to influence the psychology of investors without any economic impact.”

The ratio: a 1:3 bonus gives 1 bonus share for every 3 held.

The eligibility rules: the bonus must be made out of free reserves built from genuine profits. Reserves built from revaluation of assets cannot be used. And a company cannot make a bonus issue if it has defaulted on payment of interest or principal on any debt security or any fixed deposit raised.

Issuing bonus shares is called capitalization of reserves. Since total shares rise with no economic change in the P&L or balance sheet, all per-share data immediately deteriorates — EPS, book value per share, market price per share. But proportionate ownership is unchanged and share count rises correspondingly, so at the overall ownership level there is no negative impact.

The arithmetic to know cold: a stock trading at ₹1,000 before a 1:1 bonus should fall to about ₹500 after, so the holding’s value is preserved: 100 shares × ₹1,000 = ₹1,00,000 before; 200 shares × ₹500 = ₹1,00,000 after. The workbook adds the honest caveat: the actual post-bonus price will be around ₹500, not exactly, because demand and supply take over.

Stock Split

A stock split reduces the face value of existing shares in a defined ratio. A 1:5 split means each existing share splits into 5, and face value falls to one-fifth. So 100 shares of ₹10 face value become 500 shares of ₹2 face value. From the company’s side there is no change in share capital, because the rise in share count is exactly offset by the fall in face value — the product stays the same.

Why do it? When the market price is so high that it restricts investor participation. A lower price per share post-split improves liquidity.

Like a bonus, a split is a book entry — more shares, lower face value, no economic benefit whatsoever. It influences investor psychology and market liquidity, nothing more. Per-share data deteriorates immediately; overall ownership is unaffected.

The real example: SBI split its shares from ₹10 face value to ₹1. A holder of 1 share now held 10 shares of ₹1 each. The stock trading above ₹2,700 at announcement traded around ₹295 post-split — so a holding worth roughly ₹2,700 (1 × 2,700) became about ₹2,950 (10 × 295), with the difference coming purely from market forces of demand and supply.

Share Consolidation (reverse split)

The exact reverse: the company increases the par value of its shares in a defined ratio and correspondingly reduces the number outstanding, keeping paid-up capital unchanged. A 5:1 consolidation turns 5 existing shares into 1 — face value rises 5×, share count falls to one-fifth. So 500 shares of ₹2 become 100 shares of ₹10. (This is the workbook’s sample question 3 — note the definition is worded exactly as “increasing the par value… and correspondingly reducing the number of shares.”)

Why do it? When the market price is so low that it damages investor perception. A higher post-consolidation price improves how market participants perceive the company’s prospects.

Again a book entry with no economic benefit. Here per-share data shows immediate improvement (fewer shares, same economics) — but proportionate ownership is unchanged, so there is no positive impact at the ownership level either. Symmetry with bonus and split: optics change, wealth doesn’t.

The arithmetic: a ₹5 stock under a 5:1 consolidation should trade around ₹25. Value check: 500 × ₹5 = ₹2,500 before; 100 × ₹25 = ₹2,500 after. Again, approximately ₹25 in practice.

Mergers and Acquisitions

These change the ownership structure of the companies involved, and the three terms are distinct — a favourite exam trap:

• Merger — the acquirer buys up the target’s shares; the target is absorbed and ceases to exist; its assets and liabilities are taken over by the acquirer.
• Acquisition / takeover — the acquirer acquires all or a substantial portion of the target’s stock; both entities typically continue to exist.
• Consolidation — companies combine to form a new company, and the merged companies cease to exist.

The four motives:

1. Synergy — distinct efficiencies combining for greater economic benefit: economies of scale, forward and backward integration, expanding the market for products and services.
2. Increased revenue and market share — when two competitors combine.
3. Geographical or other diversification — acquiring in a different geography or complementary business space for competitive advantage.
4. Taxation — a profitable company buying a loss-making one to enjoy a tax shield against the target’s losses.

The regulation: a listed company’s shareholding pattern can change through substantial acquisition of shares and voting rights by an acquirer and persons acting in concert. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 provide the triggers and requirements, and give public shareholders an opportunity to exit if they choose.

Demerger / Spin-off

A spin-off is when a company carves one or more existing businesses into a separate company. Shareholders on the record date receive shares in the new company in proportion to their holding in the parent.

The workbook’s examples are all Adani: in April 2018, Adani Enterprises spun off its renewable energy business into Adani Green Energy, with shareholders getting shares in the ratio 761:1000. Earlier, in June 2015, Adani Enterprises spun off its ports business and its power-and-transmission business into Adani Ports and Adani Transmission respectively.

Scheme of Arrangement

When a company fails to fulfil an obligation to creditors or to a class of shareholders (the workbook’s example: failing to redeem preference shares), the company and those creditors or members may enter a scheme of arrangement.

It is a court-monitored settlement process between the company and its creditors or members, typically involving reorganization of share capital — existing shareholders may relinquish part of their ownership in favour of creditors, or classes of shares may be consolidated or divided.

The legal route: Section 230 of the Companies Act 2013. The term covers all types of corporate restructuring, including M&A — invoking it under bankruptcy conditions is only one of its uses. The claimant approaches the National Company Law Tribunal (NCLT), which then orders a meeting between the company and its creditors and/or members to arrive at a compromise or arrangement.

Loan Restructuring

A mechanism for companies in financial distress that can’t meet obligations to lenders: restructuring debt by modifying one or more loan terms — the amount, the rate of interest, the mode of repayment (funds and/or equity in the company), and the term — so that the repayment obligation fits the borrower’s payment capacity.

It benefits both sides. The borrower gets a feasible repayment path and avoids being declared a defaulter, freeing it to rebuild the business and repair the balance sheet. The lender can expect some repayment on a loan that would otherwise be written off as bad debt.

The process: analyse the company’s debt position, meet the lenders, provide information on current and future financial position, and produce a workable repayment plan. Crucially, the lenders must be given a concrete business plan showing how the company will generate the revenues to meet the new terms and fund the business.

Buyback of Shares

A company with excess cash has three options: expand the business, reduce borrowings, or distribute to shareholders. Choosing the third, management must pick between a dividend (homogeneous distribution to everyone) or a buyback — which gives shareholders a choice: take money by selling shares back, or take it “in kind” as enhanced value per share through higher EPS and book value per share.

Six motives (worth memorising as a list):

1. To give a value boost to a stock seen as undervalued.
2. Excess cash and a lack of profitable investment opportunities.
3. As a confidence-building measure.
4. As a defensive strategy against a potential takeover.
5. To reduce equity and thereby increase leverage.
6. To diffuse the dilution in promoters’ holding caused by things like ESOPs.

And the workbook’s honest caveat, which is very much in the spirit of Chapter 7: every management talks about the positive impact on minority shareholders, but it is very difficult to ascertain management’s true intention behind a buyback.

The rules: buybacks can be done only out of reserves and surplus. The bought-back shares are extinguished within a stipulated timeframe, reducing share capital. Eligibility mirrors the bonus-issue restriction: the company must not have defaulted on interest or principal on debentures, fixed deposits or any other borrowings, on redemption of preference shares, or on payment of a declared dividend. The methods: the tender method (a proportionate offer to existing shareholders), the open market through a book-building process or through the stock exchange, or from odd-lot holders. The company must pass a special resolution specifying the timeframe and the maximum buyback price.

The effect: fewer outstanding shares means higher EPS even with unchanged profit, and potentially higher dividend per share. Assuming market value based on earnings stays the same and is now spread over a smaller share count, market value per share goes up. Note the contrast with bonus/split/consolidation: a buyback involves real cash leaving the company, so it genuinely changes the equation — it isn’t cosmetic.

Delisting and Relisting

Delisting is the permanent removal of a company’s shares from a stock exchange. Two kinds:

• Compulsory — shares delisted for non-compliance with regulations and the clauses of the listing agreement.
• Voluntary — the company chooses to delist and go private. Motives range from regulatory reporting complexity and compliance, to mergers and acquisitions, to wanting freedom to execute a changed strategy.

The voluntary delisting process — the numbers here are prime exam material. SEBI requires the promoter group to provide an exit opportunity to all shareholders, inviting bids through a reverse book building process: the promoter specifies a floor price, and shareholders specify the price at which they’re willing to sell. The promoter may then accept the bid price, reject it (cancelling the delisting), or make a counteroffer to the public.

The thresholds: voluntary delisting can go through only if promoter holding crosses 90% — if that isn’t achieved, the company cannot delist. And at least 25% of public shareholders must participate in the reverse book building.

Protection for those left behind: if a company is delisted while some shares are still publicly held, those shareholders retain the right to sell to the promoters, who must offer to buy at the exit price within one year. And the principle underneath it all: no minority shareholder can be forced to exit at the time of delisting.

Relisting timelines (per the SEBI (Delisting of Equity Shares) Regulations, 2009): a company may apply for relisting 5 years after a voluntary delisting, and 10 years after a compulsory delisting. The asymmetry makes sense — compulsory delisting was a punishment for non-compliance.

Share Swap

A swap is simply an exchange — so a share swap means exchanging one set of shares for another. The term is most often used during a merger or acquisition when the acquirer uses its own stock as cash to purchase the business. Each shareholder of the acquired company receives a predetermined number of the acquirer’s shares. The critical prerequisite: before the swap, each party must accurately value its own company so a fair swap ratio can be calculated.

The one idea that ties the chapter together

Sort every action into two buckets and most questions answer themselves:

Cosmetic — no economic impact, pure optics and psychology: bonus issue, stock split, share consolidation. Share count and per-share figures change; total wealth does not. Bonus and split make per-share data deteriorate; consolidation makes it improve; ownership proportion is untouched in all three.

Real — actual economics change: dividend (cash leaves), rights issue (cash enters, and non-participants get diluted), buyback (cash leaves, share count falls, EPS genuinely rises), M&A, demerger, scheme of arrangement, loan restructuring, delisting.

How this chapter is tested

Chapter 9 carries about 5 marks and is largely recall — but recall of precise definitions, ratios and thresholds rather than vague concepts.

The workbook’s three sample questions show the pattern perfectly, and all three are definition-matching: new shares to existing shareholders without any consideration = a stock dividend (the bonus issue’s other name — note the distractors are all types of cash dividend); the Companies Act requirement to offer new shares to existing shareholders first = a rights issue; and increasing par value while correspondingly reducing share count = share consolidation (not a stock split, which is the opposite).

The traps are the look-alike pairs, as usual: bonus vs rights (free vs paid); bonus vs split (reserves capitalized and face value unchanged vs face value reduced and no reserve movement — both increase share count, which is why they get confused); split vs consolidation (opposite directions); merger vs acquisition vs consolidation (who ceases to exist); dividend vs buyback (compulsory-for-all vs shareholder’s choice); and interim vs final dividend.

The numbers most likely to be asked: dividend payable within 30 days; TDS of 10% above ₹5,000; rights issue open 15 to 30 days with the abridged letter of offer 3 days before opening; bonus only from free reserves, never revaluation reserves; delisting needing 90% promoter holding and 25% public participation, with the 1-year exit window; relisting after 5 years (voluntary) / 10 years (compulsory); the Takeover Regulations of 1997; Section 230 and the NCLT for schemes of arrangement; and the 761:1000 Adani Green ratio if they get very specific.

And expect the arithmetic, because it’s easy to set: post-bonus price (₹1,000 → ₹500 on 1:1), post-split share count and face value (100 shares of ₹10 → 500 of ₹2 on 1:5), post-consolidation price (₹5 → ₹25 on 5:1), and rights entitlement (10 shares, 1-for-2 → 5 new shares). Every one of these is a value-preservation check: multiply share count by price before and after and confirm the total is unchanged.

My approach: a single two-column table splitting “cosmetic vs real” actions, a flashcard for each threshold number, and five minutes practising the value-preservation arithmetic in both directions. This chapter is genuinely quick marks if you memorise it properly — don’t lose them by treating it as a filler chapter after the intensity of Chapter 8.

Next up: Chapter 10 — Valuation Principles. Twelve marks, the second of the two make-or-break chapters, and where DCF, relative multiples and cost of capital finally arrive. See you in the next note.

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Note: These are my personal study notes as I prepare for the NISM-Series-XV Research Analyst exam. They are for learning purposes only and are not investment advice.