Non-cash corporate action
Also written Non-cash corporate actions
A 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.
In plain language
Not every corporate action pays cash. A bonus issue gives shareholders more shares. A rights issue lets them buy new ones. A split replaces each share with several of lower face value. A merger swaps one company's shares for another's.
These are non-cash corporate actions, and here the depository does more than hand over a list. It actually credits the new securities to - and debits old ones from - investors' demat accounts on a date the issuer or registrar specifies.
Because new shares of a listed company should not be sold before they are admitted to trading, many of these credits first go into a temporary ISIN that is frozen for debit.
How it works
From Chapter 10 (sections 10.1 and 10.3.2 to 10.3.5):
Definition. Non-cash corporate actions distribute benefits other than cash, such as bonus issues, rights offers and conversion of securities; the depositories in India facilitate their distribution.
Process. From the holdings as of the cut-off date, the issuer/RTA informs eligible BOs and sends allotment details; the depository credits the accounts on the execution date requested by the issuer/RTA. Records that do not match the depository's are rejected; if not rectified in time, those allotments are kept in abeyance until the allottees' demat accounts are confirmed. Preferential allotments and shares from conversion of warrants/debt by listed companies must be in demat form.
Specific actions:
| Action | Depository treatment |
|---|---|
| Rights (SEBI, Jan 22, 2020) | REs credited in a separate ISIN before issue opens; REs trade on exchanges (T+1) till at least four days before closure; allotted shares credited in a temporary ISIN frozen for debit |
| Merger / amalgamation | Debit transferor ISIN; credit transferee (temporary, if listed) ISIN per ratio |
| Capital reduction | New ISIN; debit old, credit new per ratio |
| Sub-division / consolidation | New ISIN for new face value; processed on record date, credit at start of next business day |
| Bonus | Listed: temporary ISIN; unlisted: normal ISIN |
| SLB / pool balances | Debited/credited by the predefined ratio |
Pledged securities. Bonus, split, consolidation or merger shares are credited to the pledgor with pledge marked in favour of the pledgee, provided a pledge exists for at least one share on the execution date.
Unlisted public companies (Rule 9A). Must issue securities only in demat form; before any buy-back, bonus or rights offer, the entire holdings of promoters, directors and KMPs must be dematerialised; and holders subscribing to bonus or rights on or after 2 October 2018 must hold all existing securities in demat form.
A worked example
Illustrative figures.
A listed company announces a 3:2 bonus (3 bonus shares for every 2 held) with record date 10 March.
| Holder | Shares on 10 March | Bonus shares | How credited |
|---|---|---|---|
| Kiran | 400, free | 400 x 3/2 = 600 | Temporary ISIN, frozen for debit; moves to regular ISIN once tradable |
| Deepa | 1,000, of which 1,000 pledged to a lender | 1,000 x 3/2 = 1,500 | To Deepa, with pledge marked for the lender |
| Arun | 50 | 50 x 3/2 = 75 | Temporary ISIN |
Mismatch. For one allottee, the RTA's file carries a DP ID that does not match the depository's records. That record is rejected; if the RTA cannot rectify it in time, the bonus shares are kept in abeyance until the correct account is confirmed.
Split variation. Later the company splits Rs 10 shares into Rs 5 shares. Kiran's 1,000 shares (400 + 600) become 2,000 under a new ISIN with face value Rs 5, credited at the start of the business day after the record date.
Unlisted company variation. If the company were an unlisted public company, its bonus shares would go directly into the normal ISIN - and under Rule 9A, a shareholder who still held some shares in physical form would have to dematerialise them before subscribing to a rights offer made after 2 October 2018.
Why NISM asks about it
Chapter 10 (Special Services - Public Offering / Corporate Actions, 7% weightage) defines non-cash corporate actions and walks through rights, mergers, capital reduction, splits, bonus and the pledgor's rights; Chapter 9 (Pledge and Hypothecation, 10%) repeats the treatment of bonus shares on pledged holdings. The review question asking which is a cash corporate action lists rights and bonus as the non-cash distractors.
Common exam traps
- Bonus, rights, conversion, split and merger are non-cash; dividend and interest are cash.
- The depository actually credits/debits for non-cash actions - it does more than provide a list.
- Temporary ISIN for listed companies; normal ISIN for unlisted bonus.
- Pledged holdings: new shares are credited to the pledgor with pledge marked, if at least one pledged share exists on the execution date - not to the pledgee.
- Sub-division/consolidation needs a new ISIN and credit at the start of the next business day.
- Mismatched allotment records are rejected and kept in abeyance, not credited to a suspense account.
- Rule 9A cut-off date: 2 October 2018.
Check yourself
1.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.
2.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.
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.
- Rights issueAn offer of new shares at a set price to existing shareholders in a fixed ratio to what they already hold, so that their proportionate stake is not diluted when the company raises fresh capital.
- ISINThe 12-character code (ISO 6166) that identifies one specific security in the depository system — country prefix, nine-character basic number and a check digit, as in INE475C01012.
- 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.
- Cash corporate actionA 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.
- 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.
- Execution dateThe date on which a depository instruction is to take effect: a DIS debit waits till the end of that day for balance and then fails; for allotments and corporate actions, the day credits are made.
- 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.