Auto Corporate Action

A stock split or a bonus issue can affect thousands, even millions, of beneficial owner accounts at once. Crediting each account one by one would take far too long.

For certain corporate actions, the depository system does not need that manual work. It applies a single fixed ratio across every affected account automatically. The workbook calls this Auto Corporate Action.

A share consolidation, a stock split, a merger or a bonus issue can all run this way, once the Issuer or R&T Agent has fed the correct ratio into the depository system.

Auto Corporate Action applies where the benefit is a fixed multiple or fraction of an existing holding — split, consolidation, merger, demerger or bonus, among others. A 1-for-5 stock split, for instance, turns every 1 share into 5. The Issuer or R&T Agent sets that ratio once, and the depository system applies it to every eligible beneficial owner's balance on the record date, without a separate instruction for each account.

This differs from how the depository handles a cash corporate action, such as a dividend, where the depository only supplies the list of eligible beneficial owners and the Issuer or its R&T Agent pays each investor directly. It also differs from most non-cash corporate actions, where the depository credits securities on the basis of allotment details the Issuer or R&T Agent supplies for each client individually.

Auto Corporate Action also has an operational role in dematerialisation. If a demat request is rejected for a reason connected to an automatic corporate action — for instance, because the underlying shares were already restructured by a split before the physical certificate reached the R&T Agent — the R&T Agent may process the request instead by crediting the client's account with the proportionate number of shares through Credit Corporate Action.

A company announces a 1-for-5 stock split: every 1 existing share of face value Rs 10 becomes 5 shares of face value Rs 2. Mr Kapoor holds 400 shares before the split, recorded in his demat account.

On the record date, the depository system runs the corporate action automatically for every beneficial owner holding that ISIN. Mr Kapoor's account is credited with 2,000 shares (400 × 5) of the new face value, with no separate instruction from him, his DP or the company needed for his account specifically.

Compare this to a dividend of Rs 8 per share declared by the same company before the split: that is a cash corporate action, so the depository only sends the company a list of eligible holders as of the record date, and the company's R&T Agent pays the dividend directly into each investor's bank account — a different mechanism from the automatic ratio-based crediting used for the split.

Chapter 3, section 3.3.6 (Role of Issuer/R&T Agent in Corporate Benefits), introduces the term at the point where splits, consolidations, mergers, demergers and bonus issues are said to execute "automatically as per the fixed ratio defined by Issuer/R&T Agent". Chapter 7's table of demat-rejection reasons also names "Rejected under Automatic Corporate Action" as a specific objection code.

Expect a question distinguishing which corporate actions run automatically by ratio (splits, bonus, mergers) from which need individual instructions (most dematerialisation-linked credits) or direct payment by the Issuer (cash benefits like dividends).

• Auto Corporate Action applies a fixed ratio across all holders at once; it is not the same as the depository crediting each investor individually on allotment details, which is how most non-cash corporate actions run.
• Cash corporate actions are not automated the same way. The depository merely supplies the eligible-holder list; the Issuer or R&T Agent pays the money directly.
• A demat request rejected for a reason tied to an automatic corporate action can still be processed later by the R&T Agent through Credit Corporate Action, crediting the proportionate quantity rather than requiring a fresh demat request from scratch.