A company may issue bonus shares to its shareholders in case of huge reserves. It can also distribute part of the profits earned to its shareholders by way of dividend and can raise additional resources by issuing rights to existing shareholders. All these actions are termed as corporate actions. These corporate actions have implications on the market price of the company. Thus announcement of bonus shares or dividend pay out is always accompanied by an upward trend in the price of the scrip. This is seen by the market as an indication of the company doing well. After the Ex-date (date after which shares are traded Ex-bonus/Ex-rights/Post-split), the price of the scrip is adjusted by stock exchanges. This is because after ex-date, buyers of scrip are not eligible for these corporate actions. We will understand this by way of an example.
Examples
i. A company ABC comes out with a bonus issue of 1:1. The price of the scrip is Rs. 100 and you are holding 100 shares. This means that you will be entitled to 100 bonus shares and your total holding will increase to 200 shares. As holding of each shareholder post-bonus will double, the stock exchange will adjust the price of the scrip to Rs. 50 on ex date (Rs. 100/2). The scrip will start trading from these levels on ex-date.
ii. A Company comes out with a right issue of 1:2, indicating a right to subscribe for 1 share for every 2 shares held by shareholders. The current price of the scrip is Rs. 100 and rights have been offered at Rs. 50. Post-rights, the price of the scrip will be adjusted at Rs. 83 [(200+50)/3]. This is because the total acquisition cost of 3 shares is Rs. 250, hence the price of 1 share on ex-date will be adjusted accordingly.
iii. In case of dividend pay-out, the yield expressed as a percentage market price is low. This is because dividend is paid on par value of shares. However the market price may be way above par value. Thus pay-out expressed as a percentage of market price is not that high. Hence stock exchanges do not adjust the price based on dividend on ex-date.
iv. In case of stock split, the price is adjusted based on the ratio of stock split. Par value of shares is Rs. 10 and stock is split in ratio of 10:1, indicating 10 shares of Rs. 1 par value each for every 1 share of Rs. 10 each. The price of the scrip is Rs. 100. Post stock split, the price will be adjusted to Rs. 10 (100/10) to reflect the split ratio.
