Corporate Actions: Meaning, Types, Shareholder Approval, and Examples

Corporate actions are essential mechanisms used by companies to restructure capital, reward shareholders, or execute strategic moves like mergers or buybacks. In this blog, we'll explain what corporate actions are, classify them into mandatory and voluntary, clarify when shareholder approval is required, and illustrate each type with real-life examples.

What is a Corporate Action?

A corporate action is any event initiated by a company that brings a change in its securities—such as shares or bonds—and directly affects shareholders. These actions may be financial (e.g., issuing dividends) or structural (e.g., mergers), and they are governed by company law and regulatory guidelines like the Companies Act, 2013 in India and SEBI regulations.

Types of Corporate Actions

Corporate actions can be broadly classified into:

1. Mandatory Corporate Actions

These are actions that automatically apply to all eligible shareholders once approved. Shareholders have no choice to participate or opt-out at the execution stage. However, shareholder approval may be required during the decision stage, depending on the Companies Act provisions.

2. Voluntary Corporate Actions

These actions require shareholder participation or consent. Shareholders may choose to accept or decline the offer.

Mandatory Corporate Actions – Detailed Explanation

Action	Shareholder Approval	Description	Example
Bonus Shares	Not required	Free additional shares issued from reserves to existing shareholders in a defined ratio.	A 1:1 bonus means 1 free share for every share held. E.g., Infosys issues 1:1 bonus.
Stock Split	Required (Special Resolution)	Existing shares are split into multiple shares to reduce the per-share price and increase liquidity.	A ₹1000 share is split into 5 shares of ₹200 each. Example: Bajaj Finserv 5:1 split.
Reverse Stock Split	Required (Special Resolution)	Multiple shares are merged into one to increase the price per share.	10 shares of ₹10 converted into 1 share of ₹100.
Mergers & Amalgamations	Required (Shareholders + NCLT approval)	Two or more companies combine to form one entity. Shareholders of merging company receive shares of the new/continuing company.	HDFC Ltd. merged with HDFC Bank; shareholders received shares of HDFC Bank.
Dividend Declaration	Not required (only Board approval)	Cash or stock dividend is paid to shareholders as a return on profits.	TCS declares ₹24 interim dividend per share. Credited directly to bank accounts.

Voluntary Corporate Actions – Detailed Explanation

Action	Shareholder Approval	Description	Example
Rights Issue	Board approval required; shareholders choose to subscribe	Existing shareholders are given the right to purchase additional shares at a discounted price in proportion to holdings.	Reliance offered shares in a 1:15 Rights Issue at ₹1257/share when market price was ₹1450.
Tender Offer / Buyback	Depends on mode (Board + Shareholder approval or Open Market)	Company offers to buy back shares from existing shareholders at a premium price. Shareholders may choose to tender their shares.	TCS offered to buy back shares at ₹4500 per share in 2022. Shareholders could participate voluntarily.

Key Clarification: Approval vs. Participation

A common confusion is:

"If shareholder approval is needed, how is it called a mandatory action?"

Answer:
- Mandatory Corporate Action: Refers to the execution stage, where shareholders have no choice once the action is approved. - However, during the decision stage, some actions (like stock splits or mergers) do require shareholder approval under the Companies Act, 2013.

Think of it like this:
Once the merger is approved, you can’t say no to receiving shares of the new entity. That’s what makes it mandatory in corporate action terms.

Conclusion

Understanding corporate actions is crucial for investors, finance students, and anyone appearing for finance interviews. Whether it's receiving bonus shares or deciding to apply in a rights issue, knowing the type of action, whether it's voluntary or mandatory, and the regulatory requirements behind it helps make informed decisions.