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Corporate Actions and Their Effects

INVESTING in the stock market is more than buying stocks when the price is low and selling when the price is high. The number of shares you hold can increase or decrease when companies that issue these shares undertake a corporate action.

Bursa Pursuit players would have experienced terms such as “share splits” or “bonus issues” during the game when a few public-listed companies (PLCs) undertook corporate action to build up their capital base. Corporate actions are also known as corporate exercises.

A corporate action is a process undertaken by a PLC to enrich its capital structure and subsequently the value of the company’s stock. Corporate actions are usually agreed upon by a company’s directors and approved by the shareholders at an AGM or EGM.

There are different types of corporate actions, and each can have an impact on the price of a share. Therefore, it is critical to know what each corporate action means to help you in your trading decisions.

Three points you need to know are:

  1. Is the corporate action a subscription, whereby you can choose to accept what is offered, or a free entitlement, where the corporate action is automatically effected through the shares you are holding.
  2. What is the ratio proposed under the corporate action, which determines how many new shares you will receive for the existing shares held.
  3. The impact of the corporate action on the price and number of shares, which will ultimately impact on your portfolio value.

However, this article will only look at the free entitlement type of corporate action.

Bonus Issues

A PLC can issue additional shares to shareholders in proportion to their existing shareholding. These are made on ratios such as 1:2 or 1:3 to increase the number of shares held by a shareholder. If the ratio is 1:2 (one-for-two), you will get one new share for every two shares you hold.

Recently, Tong Herr Resources Bhd, a main board listed industrial company made a one-for-two (1:2) bonus issue to shareholders. This means, for every two Tong Herr shares held, you’d get an additional share, bringing the total to three shares.

However, there is a corresponding effect on the share price which typically goes down after a bonus issue, before market forces determine the price thereafter. The net effect from the bonus issue will depend on the price of the share after the bonus issue, multiplied by the number of increased shares you now hold.

Share Splits

When a PLC feels that its share price is too high and wants it to be more attractive to a wider pool of investors, the company would split the shares to increase the number of outstanding shares in the market while ensuring the paid-up capital remains the same. The resulting increase in available shares will make the stock more affordable to interested buyers. Shares are usually split by ratios such as 2:1 or 5:1.

A second board plantation company, Pembinaan Limbongan Setia Bhd, recently did a share split of five-for-one (5:1). This means that one PLS share will now become five shares. Of course, the price changes as well! If the pre-split price was RM5, then the price after the split will be RM1 before market forces determine the price.

Share Consolidation

This is exactly opposite of a share split. Share consolidation means that each share is replaced with a smaller number of shares with a higher par value. A two-to-one (2:1) share consolidation means that if you currently hold two shares with a par value of 50 sen, then after the 2:1 share consolidation, you will now have one share with a par value of RM1.


When PLCs make good profit, they may decide to pay a portion of that income to shareholders in the form of a dividend.

When a dividend is issued, the equity of the company can be affected because the distributable equity has been reduced. Let’s say you hold 100 shares of a certain PLC, and the company decides to pay a 50 sen dividend, you will then receive RM50 as dividend based on the 100 shares you hold.

So, remember that each corporate action will have an effect on the number of shares you hold and the price of the share, which will ultimately affect your portfolio value.

For more info, log on to: www.bursamalaysia.com

Source: The Star, 22 November 2007

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