Corporate Action

Corporate Action A corporate action is an event initiated by a

public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders.

http://en.wikipedia.org/wiki/Public_company

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Dividend

http://en.wikipedia.org/wiki/Shareholder

http://en.wikipedia.org/wiki/Stock_split

INDEX1. BOND Exchange

2. Bonus Issue

3. Conversion

4. Dividend Reinvestment

5. Full / Partial Call

6. Liquidation

7. Merger

8. Return of capital

9. Reverse stock split

10. Rights Issue

11. Spin Off

12. Stock Dividend

13. Stock Split

INTRODUCTION

• An exchange offer is an offer made by corporation to retire its securities from the market by exchanging the outstanding security for another type of security.

• An exchange offer is made when a corporation decides to change its capital structure. It may need to eliminate costly, obsolete, or restrictive features offered with the outstanding security issue.

ACCOUNTING TREATMENT• Book on Ex Date of the Corporate Action, if it is

mandatory or ‘Non-voluntary’ event or book on Expiration date if it is ‘Voluntary’ event.

• Calculate the new shares to be purchased by multiplying Client response to share ratio if it is voluntary event.

• Calculate the new shares to be purchased by multiplying prior to Ex date holdings to share ratio if it is Non-voluntary event.

• We book Sell trade on parent cusip & buy trade on the entitle child cusip in both type of events.

CUSTODY TREATMENT

• Custody will also book Sell on parent cusip & Buy Trade onto the resultant Cusip according to corporate action share ratio.

• Custody would book a separate sell & buy trades for shares which are On-Loan & for those which are Off – Loan.

SAMPLE OF BOND EXCHANGE OFFERDetails of Corporate Action:

Exp Date: 03/04/2008

Record Date:

Payable Date:

Ratio: 1 unrestricted security for existing one restricted security

Client Response: 480000

IMPORTANT NOTES• In US Bond exchange offers, holding of the parent

security moved to the contra cusip ( Temp CUSIP) after response received from client. But we do not post any trades for such movements unless holding from contra cusip not moved to child Cusip.

INTRODUCTION• A Corporation issues extra shares of a Security to its

Shareholders at “NO COST”.• Bonus Shares are those shares issued by a company to

its existing Shareholders at “ZERO COST or FREE”. It means that the Shareholders are benefitted by some additional shares without paying for it.

ACCOUNTING TREATMENT• Book on Ex Date of the Corporate Action.• Calculate the new shares to be purchased by multiplying

your Ex-date holding by ratio given.• We book a BUY Trade on system or there is an Auto

SPDIV, in both the cases the Shares are bought at ZERO COST.

CUSTODY TREATMENT• Custody will also book a Buy Trade onto the resultant

Cusip as provided on BCAR which can be Same Parent Cusip or New Cusip.

• Custody would book a separate buy trade for shares which are On-Loan & for those which are Off – Loan.

SAMPLE OF BONUS ISSUE Details of Corporate Action: Ex Date: 12/03/2008

Record Date:11/03/2008

Payable Date: 16/03/2008

Ratio: 3 New shares for Existing 10 shares

Fund: ABCD

Holding (Prior to Ex Date): 14259

INTRODUCTION

• A conversion is an offer made by corporation to convertible bondholders & convertible preferred stockholders to convert their securities to common stock of the company.

• Corporations issue convertible securities to offer investor flexibility. The conversion will usually takes place when the common stock has greater value than the convertible bond or preferred stock.

ACCOUNTING TREATMENT• Book on Ex Date of the Corporate Action, if it is

mandatory or ‘Non-voluntary’ event or book on Expiration date if it is ‘Voluntary’ event.

• Calculate the new shares to be purchased by multiplying client response to share ratio updated, if it is voluntary event.

• Calculate the new shares to be purchased by multiplying prior to Ex date holdings to share ratio updated, if it is Non-voluntary event.

• We book Sell trade on parent cusip & buy trade on the entitle child cusip in both type of events.

CUSTODY TREATMENT• Custody will also book Sell on parent cusip & Buy Trade

onto the resultant Cusip provided according to corporate action share ratio.


SAMPLE OF CONVERSION

Details of Corporate Action:

Exp Date: 31/12/2007

Record Date:

Payable Date:

Ratio: 0.7244352 GBP shares for Each EURO share

Fund: ABCD

Client Response: 49059 shares

INTRODUCTION• A Dividend Reinvestment Plan offers shareholders

choice of reinvesting a cash dividend distribution to purchase additional shares of the company.

• Offering stockholders the option of reinvesting dividends is an attractive investment strategy for most investors.

• For corporation it gives Cash flow & tax benefits.


Client response to net cash dividend receivable divided by reinvestment price plus commission & stamp duty; if applicable.

• We book a BUY Trade on amount which is equal to entitled shares into reinvestment price plus commission & stamp duty if applicable.


Cusip provided.• Custody would book a separate buy trade for shares

which are On-Loan & for those which are Off – Loan.

SAMPLE OF DIVIDEND REINVESTMENT PLAN


Ex Date: 06/02/2008



Ratio: Reinvestment price GBP 2.00675

Net Cash dividend Rate GBP 0.013

Response: 123181

STOCK CASH OPTION• Stock Cash option is also similar to Dividend

reinvestment Plan & both these actions have same treatment except Stock Cash option will be booked on expiration date while dividend reinvestment plan will be booked on Ex-Date.

• Sometimes instead of Reinvestment Price there is stock ratio updated in Stock Cash option corporate action. In such cases, we calculate the entitlement by multiplying stock ratio by the response given.

SAMPLE OF STOCK CASH OPTION


Ex Date: 18/01/2008

Record Date:31/12/2007 Payable Date: 31/01/2008 Ratio: 0.064841126 new shares per each responded share Fund: ABCD Response: 8287

IMPORTANT NOTES• In this stock cash option, cash option gets prorated.

Shareholders will not receive cash dividend @ USD 2.51 but will receive cash dividend @ USD 0.808113 & 0.043965048 share per each responded share because of proration.

• We will calculate the entitlement by multiplying client response to share ratio updated & buy these shares @ amount which is equal to client response multiplied by USD 1.701887 i.e. ( USD 2.51- USD 0.808113) dividend to be capitalized.

INTRODUCTION• A Corporation issues Bond with provision that it may

have the right to redeem or “Call” full or partial redemption of the bond issue before its maturity date.

• A corporation issues callable bonds because it provides control over an outstanding security. If the interest rates decline to the point that it becomes too costly to have an issue outstanding, the issuer can invoke the call provision. This enables the issuer to refinance the debt by selling the bond at a lower interest rate.

• In “Full Call” entire holding of the shareholders get redeemed while in “Partial Call” only some percentage of the bond issue get redeemed.

ACCOUNTING TREATMENT FOR FULL CALL

• Book on Ex Date of the Corporate Action.• Calculate the call amount by multiplying redemption rate

updated to original face position or current position.• We book Sell trade on accounting, selling entire position

against call amount.

CUSTODY TREATMENT FOR FULL CALL

• Custody will also sell the entire bond position against call amount.

• Custody will book the sell trade against original buy (Original Face) trade. But if it is Sinking Bond you will find accounting trade has been booked against the current position which is valid.

SAMPLE OF FULL CALLDetails of Corporate Action:

Ex Date: 15/04/2008

Blocking Date:14/04/2008


Redemption Rate: EUR 0.251385312

Original Face: 100000

Current Position: 25138.61

IMPORTANT NOTESIn US Tenders, we wait for custody cash movement. Custody will transfer holding from parent to contra Cusip & there will be cash movement against contra Cusip. But on accounting we will book sell trade only on parent Cusip against cash received on the custody.

INTRODUCTION• Liquidation means winding-up or dismantling of the

business. Assets of a company are sold, debts paid to creditors( in order of priority) & remaining proceeds distributed to the shareholders.

• An unprofitable company will go through various stages in an attempt to reverse its problems. But if they can not be resolved it will ultimately go into liquidation.

ACCOUNTING TREATMENT• We process Liquidation on custody movement only.• We will mirror trade booked on custody on to the

accounting, taking same trade date & pay date as used in trade booked on custody.

CUSTODY TREATMENT• Custody will also book Sell on parent cusip & Buy Trade

onto the resultant Cusip provided according to corporate action share ratio.


INTRODUCTION• It is action taken by corporations to merge two or more

corporations to form an independent legal entity.• A merger usually takes place as result of one corporation

having product or services that other corporation needs or used.

• A merged corporation may also be able to increase financial leverage & service opportunities.

ACCOUNTING TREATMENT• Book on Ex Date of the Corporate Action.• If it is cash merger, we will sell parent Cusip at the cash

rate given.• If it is securities merger, we will sell parent Cusip at full

cost & by the entitlement Cusip updated at the same cost.

CUSTODY TREATMENT• Custody will sell parent Cusip at the cash rate as

provided, if it is cash merger.• If it is securities merger, custody will sell parent Cusip &

buy the entitlement Cusip as updated.• Custody would book a separate trades for shares which

are On-Loan & for those which are Off – Loan.

SAMPLE OF MERGERDetails of Corporate Action:

Ex Date: 03/03/2008



Ratio: GBP 1.9306 per each share.


SCREENSHOT OF CUSTODY SIDE• On Custody side you won’t be able to find any trade on

Ex - date, as the same would appear on custody side around payable date (which is 17/03/2008) for Off – Loan Shares. Incase of those which are On – Loan it would be received within a period of 90 Days from Payable Date.

IMPORTANT NOTES• Sometimes in voluntary cash mergers proration factor is

applied. In such cases, for un-prorated response client may get security. In such case we sell the parent Cusip with full cost using cash broker & buy the entitlement Cusip @ reduced cost i.e. full cost minus cash receivables.

Definition• A return from an investment that is not considered

income. The Return of Capital is when some or all of the money an investor has in an investment is paid back to him or her, thus decreasing the value of the investment. This is not a gain of any type because it is not in excess of the original investment.

• A Special dividend is a payment made by a company to its shareholders that is separate from the typical recurring dividend cycle, if any, for the company. The difference may be the result of the date of issue, the amount, the type of payment, or a combination of these factors.

Reason for Return of Capital• Surplus Cash Reserves• Optimization of Capital Structure• Restructuring Financial ratios• Sale of Non-Core Business Assets

Methods of Return of Capital• Special Dividend• Share Buyback• Capital Restructuring

Reason for Special Dividend• Strong Company Earnings• Confidence among Investor• Labeling the dividend as “Special Dividend”

Benefits to Company• Optimum utilization of Capital (ROC)• Sign of Sustainability• Cost effectiveness• Attracting new investors

Benefits to Shareholders• Special Payment other than Normal Dividend• Tax Benefits (ROC)• Pay Back to Investor (ROC)

Effects on Accounting & Custody• In case of Return of Capital, on accounting we pass a

negative POAJ to reduce book cost of the security invested

• On custody, cash will be received on system.• In case of Special Divs, if needed to treat it as Capital we

pass a negative POAJ or if needed to treated it as Income, income line will be set up and would be received as per receipt on the custody side

Example• Security holding: 1000 shares• Dividend of amount GBP2.00• Negative POAJ of GBP2000.00 to be passed in order to

reduce the book cost of the security (if treated as capital)• Income line will be set up for GBP2000.00 on the ex date

and would be received on pay date (if treated as income)

INTRODUCTION• It is an action taken by a corporation to decrease the

number of outstanding shares at predetermined ratio.• A shareholder’s proportion of ownership remains the

same even though the number of shares decrease & price per share increases.

• Corporation may elect to exercise a reverse split to increase trading activity.


your Ex-date holding by ratio given.• We book sell & buy trade. We sell the parent Cusip at

the cost & buy the entitlement Cusip at the ratio at the same cost.

CUSTODY TREATMENT• Custody will book sell & buy trade. Custody will sell

parent Cusip & book buy trade onto the entitlement Cusip as provided on BCAR.

• Custody would book a separate sell & buy trade for shares which are On-Loan & for those which are Off – Loan.

Sample of Reverse Stock Split Issue


Ex Date: 22/023/2008



Ratio: 67 new shares for 74 existing shares


IMPORTANT NOTES• Sometimes there is return of capital action with reverse

stock split. In such cases, we sell the parent Cusip at the full cost & buy the entitlement at reduced cost i.e. parent cost minus cash entitlement.

INTRODUCTION• A stock right is a privilege granted to the existing

shareholders of a corporation to subscribe new issue of common stock before it is offered to the public, & to maintain their percentage of ownership in the corporation.

• A company may issue rights to raise additional capital for a specific venture. A company issues rights at the discounted (Subscription) price.


your Ex-date holding by ratio given.• We book a BUY Trade. Shares are bought at ZERO

COST if price of the rights is less than 15 % of price of the parent. If price of the rights is more than 15 % of parent’s price then we will do the cost allocation between parent & rights according to percentage updated.


Cusip as provided.• Custody would book a separate buy trade for shares


SAMPLE OF RIGHTS ISSUEDetails of Corporate Action:

Ex Date: 15/01/2008



Ratio: 2 Rights for existing 9 Ordinary shares


RIGHTS ISSUE - EXERCISE After rights issue, action follows is Exercise rights which

is voluntary action where client have following four options.

Option1 -: Exercise rights & purchase new shares at exercise price.

Option2 -: Request Sub custodian/ broker to sell the rights in the market.

Option3 -: Request Bank to sell the rights in the market on their behalf.

Option4 -: Allowing rights to be lapsed.

ACCOUNTING TREATMENT• Book on expiration date.• If client opted for exercise we will sell right Cusip & buy

the new Cusip.• If client opted for sale of rights then we would wait for

sell of rights on custody & mirror the custody trade.• If client opted for lapse, we would give same treatment

as rights sold.

CUSTODY TREATMENT• If client opts for exercise custody will also sell parent

Cusip & buy the new Cusip.• If client opts for sale of rights, custody will sell rights

before expiration date.• If client opts for lapse, custody will book sell trade for

lapsing rights after expiration date.

SAMPLE OF RIGHTS EXERCISEDetails of Corporate Action:

Exp Date: 06/02/2008

Debit Date: 06/02/2008

Payable Date:

Ratio: 1 new share for 1 Right

Response: 9733

NEW TO ORDINARY(PARI-PASSU)• This is non voluntary action where new shares will rank

“Pari-Passu”.• This action will only take place when client receives new

shares in exercise corporate action which are not tradable at exchange. So by this action shareholders will receive shares which are tradable on exchange.

ACCOUNTING TREATMENT• Book on EX date of the corporate action.• We will sell new shares at cost & buy the ordinary line at

the same cost.

CUSTODY TREATMENT• Book on EX date of the corporate action.

• Custody will also sell new shares & buy the ordinary line at.

SAMPLE OF NEW TO ORDINARY CORP ACT.


Exp Date: 07/02/2008


Ratio: 1 Ordinary Share for 1 New Share


INTRODUCTION• It is an action taken by a corporation to separates a

portion of its operations or subsidiary company to create an independent company

• A spin off usually takes place when a corporation decides not to contribute additional capital to a subsidiary. It then separates that subsidiary to be a freestanding legal entity.


your Ex-date holding by ratio given. • We book buy trade on entitlement Cusip & book Sell &

buy trade on parent Cusip to give effect of cost allocation. We sell the parent Cusip at the 100 %cost & buy the same at reduced percentage of the cost given while buy the entitlement Cusip at the ratio at the percentage of cost updated.

CUSTODY TREATMENT

• Custody will only book buy trade on entitlement Cusip. • Custody would book separate buy trades for shares


Sample of Spin-Off IssueDetails of Corporate Action:

Ex Date: 04/03/2008

Record Date: 03/03/2008


Ratio: 4 shares of new company for existing one share


Local Cost : 1263465.59 USD

Base Cost : 1263465.59 USD

IMPORTANT NOTESCost allocation effect would be given on accounting only as Custody never consider the cost. So there will be no corresponding sell & buy trade booked on to the parent Cusip on custody side as it is booked on accounting to give effect of cost allocation.

INTRODUCTION

• A Stock Dividend is a Distribution of Profits (in the form of Stock) i.e. declared by Corporations Board of Directors to its Shareholders

• This is where you will receive extra shares in Security instead of Cash Dividend


your Ex-date holding by ratio given on the BCAR. The Ratio is found on the second screen of the BCAR.

• We book a BUY Trade on MCH (using REDB) or there is an Auto SPDIV, in both the cases the Shares are bought at ZERO COST.


Cusip as provided on BCAR which can be Same Parent Cusip or New Cusip.

• Custody would book a separate buy trade for shares which are On-Loan & for those which are Off – Loan.

SAMPLE OF STOCK DIVIDENDDetails of Corporate Action:

Ex Date: 16/01/2008Record Date:18/01/2008Payable Date: 08/02/2008Ratio: 0.05 for 1 per ShareHolding (Prior to Ex Date): 1260 Shares

IMPORTANT NOTES• In US stock dividend, F10 screen or second screen of

BCAR never gets updated & you will find the ratio on F6 screen or first screen of BCAR.

• In Taiwan stock dividend, With holding tax get debited from Client’s account which we do not process.

INTRODUCTION• A stock split is an action taken by a corporation to

increase the number of outstanding shares and decrease the market price.

• When the shares are distributed to stockholders, current price per share will decrease proportionate to the increase in shares. Also, the shareholders proportion of ownership remains unchanged.


your Ex-date holding by ratio given.• We book a BUY Trade or there is an Auto SPDIV, in

both the cases the Shares are bought at ZERO COST.• If the entitle Cusip is different than parent Cusip, we will

book Sell & Buy trade. We will sell parent Cusip at the full cost & buy the new Cusip according to share ratio @ the same cost.


Cusip according to ratio provided, Resultant Cusip is same Parent Cusip. If the entitlement is different than parent Cusip, Custody will sell parent Cusip & buy the new Cusip according to share ratio.

• Custody would book a separate buy & sell trades for shares which are On-Loan & for those which are Off – Loan.

SAMPLE OF STOCK SPLIT ISSUEDetails of Corporate Action:

Ex Date: 03/03/2008



Ratio: 10:1

Fund: XB1Y


• We do not process cash receives for fraction shares resulted out of stock split.

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Corporate Action

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