Corporate Action Training Module

7/27/2019 Corporate Action Training Module

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Corporate ActionsUnit Level Training Module



Definition of Corporate Actions

• Corporate Action is defined as any event that bringsmaterial change to a company and affects its stakeholders.

• This includes shareholders, both common and preferred, aswell as bondholders.

• These events are generally approved by the company'sboard of directors; shareholders are permitted to vote onsome events as well.



Purpose of Corporate Actions

Return profits to shareholders:Cash dividends are a classic example where a public company declares a

dividend to be paid on each outstanding share.

Influence the share price:If the price of a stock is too high or too low, the liquidity of the stock suffers.Stocks priced too high will not be affordable to all investors and stockspriced too low may be de-listed. Corporate actions such as stock splits or

reverse stock splits increase or decrease the number of outstanding sharesto decrease or increase the stock price respectively. Buybacks are anotherexample of influencing the stock price where a corporation buys backshares from the market in an attempt to reduce the number of outstandingshares thereby increasing the price.

Corporate Restructuring:

Corporations re-structure in order to increase their profitability. Mergersare an example of a corporate action where two companies that arecompetitive or complementary come together to increase profitability. Spin-offs are an example of a corporate action where a company breaks itself upin order to focus on its core competencies.



Types of Corporate ActionsMandatory Corporate Action:

• A mandatory corporate action is an event initiated by the corporation by theboard of directors that affects all shareholders.

• Participation of shareholders is mandatory for these corporate actions. Anexample of a mandatory corporate action is cash dividend.• All holders are entitled to receive the dividend payments, and a shareholder

does not need to do anything to get the dividend.• Other examples of mandatory corporate actions include stock splits,

mergers, and spin-offs.

Voluntary Corporate Action:• A voluntary corporate action is an action where the share holders elect to

participate in the action. A response is required by the corporation toprocess the action.

• An example of a voluntary corporate action is a tender offer. A corporationmay request share holders to tender their shares at a pre-determined price.

The shareholder may or may not participate in the tender offer.Shareholders send their responses to the corporation’s agents, and thecorporation will send the proceeds of the action to the shareholders whoelect to participate.

• Some times a voluntary corporate action may give the option of how to getthe proceeds of an action. For example in case of a cash/stock dividendoption, the shareholder can elect to take the proceeds of the dividend eitheras cash or additional shares of the corporation.



The Generic Corporate Action Lifecycle

1. Communication of event data (by the issuer)

2. Capture & cleansing of event data

3. Determining entitlement

4. Communication of event information

5. Calculation of resultant entitlement

6. Passing internal entries

7. Receipt & disbursement of resultant entitlement

8. Updating of internal entries

9. Reference/Static Data

10. Initial Declaration of Event Terms

11. Capturing Event Terms

12. Ascertaining Entitlement13. Informing Relevant Parties

14. Calculating Final Entitlement

15. Receiving & Crediting Final Entitlement

16. Tax on Income



Important Dates and their meaning

Book Closure Date:Only members listed in the company's registration as at the cutoff date wouldbe entitled to receive the corporate benefits. However, because sharescontinuously change hands during transactions, identifying the owner ofcertain shares becomes complicated. If a company announces book closuretoday, anyone who currently owns the stock will be entitled to the dividend.

Ex-Date:This is the date on which the seller, and not the buyer, of a stock will be

entitled to a recently announced dividend. The ex-date is usually two businessdays before the record date. It is indicated in newspaper listings with an x.

Record Date:On the record date, a company looks to see who its shareholders or "holders ofrecord" are. Essentially, a date of record ensures the dividend checks get sentto the right people.

Payment Date:Only those shareholders who bought the stock before the ex-dividend datereceive the dividend on the date of payment (payable date).



Important Dates and their meaning (Illustration)

If I sell my shares before the ex-dividend date will I still get thedividend?

• If you sell before the ex-dividend date you will not receive a dividend fromthe company.

• The ex-dividend date is the date that the company has designated as the firstday of trading in which the shares trade without the right to the dividend.

• If you sell your shares on or after this date, you will still receive the dividend.• If a shareholder is to receive a dividend, he or she needs to be on the

company's records on the date of record.• When you purchase shares, your name does not automatically get added to

the record book- this takes about three days (depending on the settlementcycle) from the transaction date.

• Therefore, if the date of record is August 10, you must have purchased theshares on August 7 to receive a dividend.• This would make August 8 the ex-dividend date, as it is the date directly

following the last date on which you could get a dividend.



Examples of Corporate Actions

Cash DividendMoney paid to stockholders, normally out of the corporation's current

earnings or accumulated profits. All dividends must be declared by theboard of directors and are taxable as income to the recipients.

Bonus IssueAn offer of free additional shares to existing shareholders. A company maydecide to distribute further shares as an alternative to increasing the

dividend payout. Also known as a "scrip issue" or "capitalization issue".New shares are issued to shareholders in proportion to their holdings. Forexample, the company may give one bonus share for every five shares held.

Dividend with OptionWhen an option is given to the shareholders to receive dividend in eithercash or shares, it is termed as Dividend with Scrip Option. On the otherhand the shareholders may also be given an option to elect the currency inwhich they receive the dividend. This is termed as Dividend with CurrencyOption.




Stock Dividend A dividend payment made in the form of additional shares, rather than a

cash payout.Also known as a "scrip dividend."Companies may decide to distribute stock to shareholders of record if thecompany's availability of liquid cash is in short supply. These distributionsare generally acknowledged in the form of fractions paid per existing share.An example would be a company issuing a stock dividend of 0.05 shares foreach single share held.

Interest The charge for the privilege of borrowing money, typically expressed as anannual percentage rate. The amount of ownership a stockholder has in acompany, usually expressed as a percentage.

Redemption The return of an investor's principal in a security, such as a stock, bond, ormutual fund.




Stock Split / Sub-Division

A type of corporate action where a company's existing shares are dividedinto multiple shares. Although the amount of shares outstanding increases by a specific multiple, the total dollar value of the sharesremains the same compared to pre-split amounts, because no real valuehas been added as a result of the split.

For example, in a 2-for-1 split, each stockholder receives an additionalshare for each share he or she holds.

One reason as to why stock splits are performed is that a company's shareprice has grown so high that to many investors the shares are tooexpensive to buy in round lots.

For example, if a XYZ Corp's shares were worth $1,000 each, investorswould need to purchase $100,000 in order to own 100 shares. Whereas, ifeach share was worth $10 each, investors only need to pay $1,000 to own100 shares.




Reverse Stock Split / Consolidation

A reduction in the number of a corporation's shares outstanding thatincreases the par value of its stock or its earnings per share. The marketvalue of the total number of shares (market capitalization) remains thesame.

For example, a 1-for-2 reverse split means you get half as many shares, but

at twice the price. It's usually a bad sign if a company is forced to reversesplit - firms do it to make their stock look more valuable when, in fact,nothing has changed. A company may also do a reverse split to avoid beingdelisted.

MergerThe combining of two or more companies, generally by offering the

stockholders of one company securities in the acquiring company inexchange for the surrender of their stock. Basically, when two companiesbecome one. This decision is usually mutual between both firms.




Merger

The combining of two or more companies, generally by offering thestockholders of one company securities in the acquiring company inexchange for the surrender of their stock. Basically, when two companiesbecome one. This decision is usually mutual between both firms.

AcquisitionWhen one company purchases a majority interest in the acquired.

Acquisitions can be either friendly or unfriendly. Friendly acquisitionsoccur when the target firm agrees to be acquired; unfriendly acquisitionsdon't have the same agreement from the target firm.

RightsA security giving stockholders entitlement to purchase new shares issued

by the corporation at a predetermined price (normally less than the currentmarket price) in proportion to the number of shares already owned. Rightsare issued only for a short period of time, after which they expire. This alsoknown as "subscription rights" or "share purchase rights".






Annual General Meeting (AGM)

A mandatory yearly meeting of shareholders that allows stakeholders tostay informed and involved with company decisions and workings.

This yearly meeting is the single event whereby shareholders are able togather and ask the board of directors questions pertaining to corporatehealth and strategy. Proper notice must be given to shareholders with

regards to meeting times and agenda.

Extraordinary General Meeting (EGM)

A meeting other than the annual general meeting between a company'sshareholders, executives and any other members. An EGM is usually called

on short notice and deals with an urgent matter.

In most cases the only time shareholders and executives meet is during theannual general meeting, which is usually at a set time. However, certainevents may require shareholders to come together to solve a certainproblem, such as the removal of an executive.



Types of risk and costs of CorporateAction processing

Type of cost Type of corporateaction involved

Who bears the cost?

Direct risk ofprocessing failures

Mandatory withoptions; voluntary

Can be anybody in the corporateaction chain (e.g., custodian, fundmanager, or broker) Liabilitydepends on which marketparticipant causes the failure

Direct cost oflate payments

Mainly mandatory(mostly dividendandinterest payments)

Investors(interest forgone)

Risk of sub-optimal

trading decisions All

Brokers or fund managers involved

in trade (if proprietary) or investors(if cost passed on)

Indirect cost ofineffective corporategovernance

Voluntary(mainly proxyvoting)

Issuers (in the longrun), investors, thesystem at large



Announcement from Company / Custodian / Sub - Custodian

Capture Key Details in the systemand enter details of entitlement

Send announcement advices toclients via swift / fax / e-mail

Track for updates and announce toclients accordingly

Send Entitlement Advices to clientson record date

Ensure disbursement of corporateaction proceeds on payment date

Send disbursement advices to clientsvia swift / fax / e-mail

Ensure all effective announcementsare actioned

Reconcile if messages are sent to alleligible clients for corporate action

Check for accuracy of details andcomputation of final entitlement

Check for accuracy and consistencyof details

Reconcile if messages are sent to allclients holding the security

Ensure to check if all updates arecaptured

Reconciliation for outgoing messages sent to clients

Steps involved in processing Mandatory Corporate Actions

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Steps involved in processing Voluntary Corporate Actions

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Announcement from Company / Custodian / Sub - Custodian

Capture Key Details in thesystem and enter details ofentitlement

Send announcement advices toclients via swift / fax / e-mail

Track for updates and announceto clients accordingly – Thisshall include updation of book

closure date and deadline datesas announced

Send Entitlement Advices toclients on record date

Ensure all effectiveannouncements areactioned

Check for accuracy andconsistency of details

Reconcile if messages aresent to all clients holding the security

Ensure to check if allupdates are captured

Reconciliation foroutgoing messages sentto clients

i l d i i l i



Steps involved in processing Voluntary Corporate Actions(continued)

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Send reminders to clients forobtaining their response as percountry’s practice

Monitor for client responseEnsure to monitor swift, fax,e-mail or scannedinstructions from CPC

Check if eligible clients haveresponded. Else sendreminders.

Upon receipt of client response,forward the same to custodianfor further processing, also

acknowledge client for the same

Ensure that the clientresponse is sent to custodianbefore the deadline date

Ensure disbursement ofcorporate action proceeds onpayment date

Send disbursement advices toclients via swift / fax / e-mail

Reconcile if messages aresent to all eligible clients for

the corporate action

Check for accuracy of detailsand computation of finalentitlement

In case of rights, also check ifnecessary funding arrangementsare made to participate in therights issue

Check for client’s standing instruction. In case of non-availability contact CPC / client



Swift Messages Used for Corporate Actions

Message Type Used For

MT 564

• To provide an account owner with the details of a corporate action event along withthe possible elections or choices available to the account owner. It can be initially sent

as a preliminary advice and subsequently replaced by another MT 564 with completeor confirmed information.

• This message will also be used to provide the account owner with details of theimpact a corporate action event will have on a safekeeping or cash account, e.g.,entitlement calculation.

MT 565

• To provide the custodian with instructions on how the account owner wishes toproceed with a corporate action event. Instructions include investment decisions

regarding the exercise of rights issues, the election of stock or cash when the option isavailable, and decisions on the conversion or tendering of securities.

MT 566• To confirm to the account owner that securities and/or cash have been

credited/debited to an account as the result of a corporate action event.

MT 567

• To advise the status, or a change in status, of a corporate action-related transactionpreviously instructed by, or executed on behalf of, the account owner. This willinclude the acknowledgement/ rejection of a corporate action instruction or the

acknowledgement/rejection of a request to cancel an outstanding instruction. It mayalso be used to provide a reason as to why a corporate action event has not beencompleted by the announced payment dates.

MT 568• To provide complex instructions or narrative details relating to a corporate action

event.

MT 599• To send or receive information for which another message type is not applicable. In

simple terms this is a free format message type.



Message flow example for a mandatory eventtype such as Cash Dividend

Account Servicer

Preliminary Complete Entitlement Receipt of NewInformation Information Calculation Shares / Cash

Account Holder

MT 564Notificatio

MT 566Confirmation

MT 564Notification

MT 564Notification



Message flow example for a voluntary eventtype such as Rights Offer

Account Servicer

Announcement Ex/Record Deadline Receipt of

of the offer Date Date new shares

or cash

Account Holder

MT 565Instruction

Response Period

MT 564notificationof offer

MT 566confirmation

of accountactivity

MT 564notificationofentitlement

MT 567 status ofinstruction

MT 564notificationof ex-dateentitlement



Swift Message FunctionsFunction must contain one of the following codes:

CANC Cancellation RequestMessage requesting the cancellation of a

previously sent message.564, 565, 568

NEWM New New message. 564, 565, 566, 568

REPEEligible Balance

Notification

Message reporting an eligible balance thatmay or may not include an entitlement

calculation or a revised entitlementcalculation.

564, 568

REPL Replacement Message replacing a previously sent message. 564, 568

RMDR Reminder Message sent as a reminder of an event takingplace. 564, 568

WITH WithdrawalMessage sent to void a previously sent

notification due to the withdrawal of theevent or offer by the issuer.

564, 568

REVR ReverseMessage sent to reverse a posting on a

previously sent confirmation.566

CAST Cancellation Request StatusMessage reporting on a cancellation request

status.567

EVST Event StatusMessage reporting on a corporate action

event status.567

INST Instruction Status Message reporting on an instruction status. 567



Swift Message Functions

Sub function, when present, must contain one of the following codes:

CODU CopyDuplicate

Message is a copy to a party other than the accountowner/account servicer, for information purposes

and the message is a duplicate of a messagepreviously sent.

COPY Copy Message is a copy to a party other than the accountowner/account servicer, for information purposes.

DUPL Duplicate Message is for information/confirmation purposes. It isa duplicate of a message previously sent.

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Corporate Action Training Module

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