Cash corporate action
Also written Cash corporate actions
A corporate action that distributes money - such as dividend or interest - where the depository only tells the issuer who was entitled on the record date, and the issuer or its RTA pays them directly.
In plain language
Corporate actions are events that affect the rights of the people holding a company's securities. Some hand out money: a dividend on shares, interest on debentures. Those are cash corporate actions.
The depository's role in them is narrow. It does not pay anybody. On the cut-off date the company announces, the depository tells the issuer (or its registrar) exactly who held the securities, with their bank details and tax status. The issuer or its RTA then pays those holders - today almost always by electronic transfer to the bank account linked to the demat account.
So for a cash corporate action, what the depository participant must get right is not the payment but the data: correct bank details and address, updated well before the record date.
How it works
From Chapter 10 (sections 10.1 to 10.3.1):
Two types. Cash corporate actions distribute monetary benefits (dividend, interest); the depository merely provides information to the issuer about persons entitled as on a cut-off date. Non-cash corporate actions (bonus, rights, conversion) are where the depository may facilitate distribution.
Cut-off dates.
- Record date: the depository's holding report lists BOs holding the ISIN as of end of day on the record date.
- Book closure: where the issuer specifies book closure start and end dates, the report is as of end of day one day prior to the book closure start date.
DP's preparation. On learning of the corporate action, DPs ensure that tax status, bank details and address changes are updated well in advance of book closure/record date, and that positions in transit accounts (settlement, intermediary accounts) are cleared into beneficiary accounts in advance. (CDSL has no transit account concept.)
Payment. On the cut-off date the depository gives the issuer/RTA holdings with tax status and bank details. The issuer/RTA pays directly to beneficial owners. Under SEBI's circular of March 21, 2013:
- listed companies must use RBI-approved electronic modes (ECS - LECS/RECS/NECS - NEFT, etc.);
- for demat holders, bank details come from the depositories;
- only where bank details (MICR, IFSC) are unavailable or electronic payment fails may physical instruments be used - with the investor's bank account details mandatorily printed on them.
Special holders.
- Balances in clearing member / clearing corporation / intermediary accounts are eligible; the benefit goes to them and is held in trust for beneficial owners.
- Pledged securities: ownership stays with the pledgor, so dividends go to the borrower in the usual way.
- Debt securities: interest comes from issuers/RTAs; for government securities, the depository distributes interest after RBI credits it.
A worked example
Illustrative figures.
A listed company declares a dividend of Rs 12 per share with record date Friday, 14 August.
| Holder | Position at end of 14 August | Dividend | Paid to |
|---|---|---|---|
| Asha | 1,500 shares, free | 1,500 x Rs 12 = Rs 18,000 | Asha's bank account on record in her demat account |
| Bharat | 800 shares, pledged to a bank | 800 x Rs 12 = Rs 9,600 | Bharat (pledgor), not the bank |
| Broker's CM pool account | 200 shares of a client awaiting transfer | 200 x Rs 12 = Rs 2,400 | The broker, held in trust for the client |
The RTA pays using the bank details the depository supplied as of the cut-off date - which is why Asha's DP should have updated any change in her bank account well before 14 August. Only if the electronic payment failed or rejected would the RTA use a physical instrument, with her bank details printed on it.
If the company had instead fixed book closure from 14 to 18 August, the holding report would be as of end of day 13 August - one day before book closure starts.
The depository itself pays nobody here. It only supplied the list.
Why NISM asks about it
Chapter 10 (Special Services - Public Offering / Corporate Actions, 7% weightage) opens with the cash/non-cash distinction; its first review question asks which of corporate benefits, dividend, rights and bonus is a cash corporate action (dividend), and the second asks who announces the record date (issuers). Chapter 11 applies the same handling to interest on debt instruments and the depository's own interest distribution for G-Secs; Chapter 9 covers dividends on pledged securities.
Common exam traps
- Dividend and interest are cash corporate actions; bonus and rights are non-cash.
- For cash actions the depository only supplies holder information - the issuer/RTA pays.
- Record date report: end of the record date. Book closure report: end of the day before book closure starts.
- Record date is announced by the issuer, not the exchange or the depository.
- Dividends on pledged shares go to the pledgor.
- CM/intermediary balances receive benefits in trust for beneficial owners.
- Physical payment instruments only as a fallback, with bank details printed.
- Exception: for government securities, the depository itself distributes interest after RBI credits it.
Check yourself
1.Which of the following is a cash corporate action?
- a)Bonus issue
- b)Dividend
- c)Rights issue
- d)Stock split
Show the answer
Answer: (b) Dividend
Cash corporate actions involve distribution of monetary benefits, e.g., dividend and interest etc.
The other three options are all non-cash: non-cash corporate actions involve distribution of benefits other than cash such as bonus issues, offer of shares on right basis, conversion of securities, etc.
And the depository's role differs between the two:
In case of cash corporate actions, depository merely provides information to the Issuer about the persons entitled to receive corporate benefits as on a cut-off date.
In case of non-cash corporate actions, depository may facilitate the distribution of corporate benefits. Presently the depositories in India facilitate the distribution of non-cash corporate benefits.
The reason is structural — money moves through the banking system, securities move through the depository. So the Issuer/its R&T Agent distribute dividend, interest and other monetary benefits directly to the beneficial owners.
What corporate actions are, generally: corporate actions are events, which affect the rights, obligations and/or interests of the beneficial owners of the securities held in a depository. The most common examples are payment of interest, dividend, bonus shares, rights, splits, merger, redemption, payment of call money, liquidation etc.
And there is one exception to the cash rule: in respect of government securities, however, the depository distributes the interest to eligible clients, after RBI has credited interest amount to the depositories account.
2.What is the depository's role in a cash corporate action, compared with a non-cash corporate action?
- a)In a cash corporate action the depository merely provides the issuer with information about the persons entitled as on the cut-off date; in a non-cash corporate action it may facilitate distribution of the benefit
- b)The depository pays dividend and interest from its own account in a cash corporate action, and only reports holdings in a non-cash one
- c)The depository has no role in either; the issuer's RTA handles both from its own records
- d)The depository distributes both cash and non-cash benefits directly to beneficial owners
Show the answer
Answer: (a) In a cash corporate action the depository merely provides the issuer with information about the persons entitled as on the cut-off date; in a non-cash corporate action it may facilitate distribution of the benefit
The workbook: "In case of cash corporate actions, depository merely provides information to the Issuer about the persons entitled to receive corporate benefits as on a cut-off date." For non-cash actions (bonus issues, offer of shares on rights basis, conversion of securities), "depository may facilitate the distribution of corporate benefits. Presently the depositories in India facilitate the distribution of non-cash corporate benefits."
- B reverses the roles. On cash benefits, the Issuer / its R&T Agent distribute dividend, interest and other monetary benefits directly to the beneficial owners, using the holding particulars the depository provides.
- C ignores the depository's part. For demat securities, the depository facilitates the execution of corporate actions, and holdings are taken from its records.
- D is wrong for cash benefits. The one exception is government securities, where the depository distributes the interest after RBI has credited it.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Record dateThe date on which a company looks at its register and decides who gets the bonus, dividend, rights or split — you must be holding the shares in your demat account at the end of that day.
- PledgeA charge created over demat securities in favour of a lender who may appropriate them unilaterally on default — created by book entry under section 12 of the Depositories Act, not by handing over anything.
- Clearing member accountThe special demat account a broker or custodian opens to settle exchange trades, through which clients' sold shares go to the clearing corporation and bought shares arrive; also called the pool account.
- Constituent SGL accountThe Subsidiary General Ledger account a depository holds with RBI on behalf of its clients, through which investors hold government securities in their ordinary demat accounts.
- Non-cash corporate actionA corporate action that distributes securities or changes holdings rather than paying money - bonus, rights, conversion, split, merger - which the depository executes by crediting and debiting demat accounts.
- Temporary ISINA new ISIN, frozen for debit, in which a listed company's shares from rights, bonus, merger or capital reduction are first credited, so they cannot be transferred until trading approval is received.
- Issuing & Paying AgentThe agent through which a commercial paper issue is allotted: it receives investors' demat details from the issuer, issues the IPA certificate and provides the allotment file used to credit CPs to demat accounts.
- Auto Corporate ActionA corporate action such as a split, consolidation, merger or bonus issue, executed automatically across all holders by a fixed ratio, without the Issuer crediting each beneficial owner individually.
- Book closureThe period an issuer sets, with a start and end date, during which the depository determines beneficial owners entitled to a corporate benefit as those holding as of the end of the day before the start date.
- Held in trustThe status of corporate benefits an Issuer or R&T Agent pays to a Clearing Member, Clearing Corporation or intermediary holding securities on a cut-off date, pending onward distribution to the true beneficial owners.
- Pari passuThe date from which new shares — from conversions, further issues or call payments — rank equally with a company's existing shares, reported to the depository the day it tells the stock exchanges.
- IPA certificateThe certificate an Issuing and Paying Agent provides on the allotment date of a commercial paper issue, confirming the allotment, and which the seller must forward to the buyer in every secondary-market trade.