We have use this word corporate transactions here only for convenience to describe the transactions between a company and its “existing” shareholders or a select few stakeholders. All the transactions listed here are one or other way the company rewards the shareholders. The company as such by law is called a going entity and is not designed for an intent of closure at point of time. So, what are the means available with the company to compensate its promoters, directors, shareholders, etc.? We have discussed the same here in this section of classification.
Salary and benefits as such is not a strategic capital payment or return on investment. It is a routine operational activity. In case of large companies, the payment of salaries and benefits to the promoters or founders or directors is regulated by the norms for directorial compensation. The payments to the top management are governed by the norms for managerial remuneration. Even in case of small private limited companies, the salaries and benefits of the executive directors are subject to the approval of the board.
Hence, they have an important strategic corporate perspective behind them. Apohan has observed that many companies prefer to show marginal profit and very high levels of salaries of directors.
When to restructure compensation of the directors? For successful mergers and acquisitions, when the 3rd parties have to share the financial benefits, the level of salaries and bestowal of benefits for the promoters for directors (who are typically the shareholders in the small and medium enterprises) need to be at par with the market levels or the real worth of their work. When the profit margins are seen to be very lean when there is no history of dividends, it becomes difficult to attract more value.
Dividend is the real (in the sense ordinary) means of a company to compensate its shareholders for their equity investment. From the profits made in a year, a fraction is retained for the provision of increased working capital and any growth initiatives or any other liability; and the rest should of the amount be distributed to the shareholders. The ratio of dividend to the current market price of the company share is called dividend yield. Dividend could be in the form of cash, stock, property, products, promissory note, scrip, etc. Payment of dividend is highly regulated by the law and dividend strategy is a key corporate strategy.
Went to prepare a dividend policy? Distribution of dividend is minimal in the growth phase of a company and it increases as the company reaches the state of stable, profitable operations.
The company can buy back its own shares from the shareholders in compliance with the corporate laws. Buybacks are carried out to consolidate the holding of the long-term, strategic players in the company. For company to be able to pay for the buyback, it needs to have a very sound financial position.
When to undertake buyback of shares? Buyback of shares increases the price of the outstanding shares as the value gets distributed over fewer shares. It makes the hostile acquisition difficult. Consolidation of share in a few hands increases the relative bargaining power of the holders.
Capital withdrawal is a process in which a company reduces the paid up capital by paying it back to the shareholders. This is a very complex process and is rarely seen in the industry.
When is capital withdrawal undertaken? This is undertaken when the company under goes for voluntary dissolution.
In the process of bonus issue, the company issues new shares to the existing shareholder in the proportion of their existing shareholding in the company. Bonus issue is carried out to energize the shareholders, and to make the stock of the company more liquid by reducing per share price.
When is issue of Bonus shares is carried out? Bonus shares are issued when the company wants to signal its investors that it is in a strong position of growth and is not in a mood to distribute the cash as it makes more sense for it to stay in the company.
It is up to the shareholders whether they want to start their shares or not. However, the company goes on making more and more profits every year and as its potential to become bigger company increases, the price of share increases.
When an investor is supposed to liquidate his equity shareholding? A shareholder is supposed to sell off his shares either if the value of the equity is going to go down, or the growth of company has reached saturation level or there is personal need of money.
All above are means how are company returns the original investment amount it are the the profit made using them. Apohan carries out professional, end-to-end, customized consultancy services under above classification of corporate activities to achieve the objectives of the business.
Apohan has a very deep understanding of the perspective of the existing shareholders of a company. It advises the best strategies for the long-term goals of the growth of the company avoiding policy mistakes.