Corporate Actions That Change What a Scheme Holds

Some issuer events recut a holding rather than add to it. The tally of securities the scheme carries moves, and the money standing behind that tally does not. Two separate records then have to catch up in step, the one that counts securities and the one that prices them. Let that pairing break and the figure published for a unit goes wrong for as long as the break lasts.

Begin with the word itself. A corporate actionSomething an issuer does to its own securities, which then reaches every holder of them without any holder asking for it. is something an issuer does to its own securities. A corporate action reaches a scheme uninvited. Nobody at the asset manager chose it, nobody negotiated it, and no order was placed. The scheme was holding a security one week and the issuer rearranged the pieces the next, and the job of operations is to record what happened faithfully enough that the number a holder reads does not wobble by accident. The events in question are the ones that change how many securities a scheme carries, or which securities they are, and not one rupee crosses the boundary of the scheme when they occur.

One scheme carries the arithmetic from here to the last line. The Girnar Large Cap Equity Fund, an invented scheme run by Girnar Asset Management Limited, is open ended and holds equities. Net assets stand at Rs 4,200 crore. Set against those are 120.00 crore units, spread over 3,80,000 folios. Dividing the net assets by the units, in that order, gives one unit at Rs 35.00, exactly, with nothing left over, and Rs 35.00 is the anchor for every figure below. Portfolio decisions belong to Kalyani Bhagat and operations report to Sohail Merchant.

The scheme comes with net assets and units and nothing else. No issuer, no quantity, no price, no ratio, no line of any portfolio. Two levels carry the whole argument without any of that: an identity, which wants no numbers whatsoever, and the scheme itself, where Rs 4,200 crore against 120.00 crore units is enough to size whatever error is ever put in front of an operations team. A missing specimen ratio costs one demonstration, and it costs not a single conclusion.

Which issuer events move the tally rather than the money?

Six of them turn up often enough to be worth naming together, and what unites them is that each one changes a count or an identity. A bonus issueAn issuer hands its existing holders extra securities in proportion to what they already hold, with nothing paid for them. hands existing holders extra securities in proportion to what they already hold. A splitOne security is subdivided into several, so the tally rises and each piece is a smaller slice of the same issuer. subdivides each security into several smaller ones. A consolidationThe reverse of a split: several securities are combined into one, so the tally falls and each piece is a larger slice. runs the other way and combines several into one. A rights issueExisting holders are offered the chance to take up new securities from the issuer, in proportion to what they already hold. offers existing holders the chance to take up new securities in proportion to their present holding. A merger folds one issuer into another, so a holding in the first becomes a holding in the second. A demergerPart of an issuer is separated into a business of its own, and a holder of the original ends up holding two lines instead of one. separates part of an issuer into a business of its own, and a holder of the original finishes with two lines where there was one.

A wedding tray of barfi is cut into forty pieces, or into eighty. The tray does not grow because the knife moved. Everyone who was going to get a twentieth of the tray still gets a twentieth of the tray, in two pieces now instead of one, and the tray weighed before and after comes to the same weight. A bonus issue and a split are that tray in one image, and the image is worth holding on to. Almost every mistake in corporate action processing comes from somebody quietly assuming the tray got bigger.

All six events touch how many pieces there are, or whose pieces they have become, and a recut of that sort is a different animal altogether from an event that pushes cash into a scheme. A payment out of an issuer to the people holding its securities is money arriving from outside. A payment is an addition, it has to be recognised, there is a moment from which the scheme has a claim on it, and net assets move. All of that is covered separately, where it gets the room it needs. Holding the two apart is not tidiness for its own sake. A recut and a receipt behave in opposite directions, and a team that files them under one heading will end up running the wrong check on one of them.

Why does a recut leave the holding worth what it was worth before?

Write the holding the way the two records actually store it. The custody recordThe register of what securities a scheme actually has, kept by the party that holds them for the scheme. carries a count, call it n. The valuation carries a price basisThe price per security that a valuation applies to a count, in order to arrive at a rupee figure for the holding., call it p. The rupee value of the holding is the product of the two, V equals n times p, and there is nothing else in it.

Now let an action recut the security by a factor k. The count becomes n times k. Each piece is now that much smaller a claim on the same issuer, so the price basis becomes p divided by k. Multiply the new count by the new price basis and watch what happens to k.

The cancellation of k is the organising fact of corporate action processing, and it is also the trap. The invariance is arithmetic and not a rule anybody made. The invariance therefore holds whatever the ratio is and whatever the holding is worth, and a check that merely restates it proves nothing about whether the records are right. The scheme did not become richer or poorer at the moment of the action. Nothing was created and nothing was destroyed. The same claim on the same issuer is now expressed in a different number of pieces.

The recut leaves the scheme neither better placed nor worse placed. If the price of the security moves in the days around such an action, that movement came from the market forming a view about the issuer, and forming a view is not the same act as recutting a claim. Whether some particular event leaves a holding better placed or worse placed is a judgement about the issuer, and a separate matter.

Which two records have to move, and who keeps each?

Here is where the identity stops being comfortable. The identity assumed that n and p both moved. In a working operation the count and the price basis are not two columns of one spreadsheet. The count and the basis are two records, kept by two parties, updated on two triggers.

The custody record belongs to the custodian, whose business is holding the securities and knowing exactly what is there. The custody record moves when the new securities are actually credited. The valuation belongs to the asset manager and follows the valuation policy the scheme has written down, and it moves when the price the market is quoting becomes a price for the recut security rather than the old one. Neither party is guessing. Each is doing precisely its own job, off its own trigger, using its own source.

The trap sits between them: change the count without changing the price basis and the holding is carried as though every new piece were worth the old price, and change the price basis without changing the count and the holding collapses to a fraction of itself. Both are arithmetic errors of the plainest kind. Neither involves a view about the issuer, a market call, or anybody exercising discretion badly. Both are tractable for that reason. An error with no judgement in it can be caught by a rule, and a rule can be run every day without anyone arguing about it.

Size cannot be put on a number without a holding, but direction can. Suppose the factor is greater than one, a bonus or a split, and the count is updated first. The value carried becomes n times k times p, or k times V. The check row reads: carried value minus true value equals V times (k minus 1). For every k above one that residue is positive. Nothing cancels in that row, and naming that in the open is what separates a control from a comfort blanket. Now run a consolidation, where k sits below one. The count drops first, the basis has not risen yet, and the very same expression V times (k minus 1) goes negative, so the holding is understated rather than overstated. One break, two signs, and a check built to hunt only for an overstatement will sail straight past half the cases it exists for.

What breaks when the two records move on different dates?

The two records usually do move on different dates. A mismatch of that kind is ordinary rather than exotic, and a team that treats it as exotic will never build a check for it. Two records, two triggers, two parties. The ordinary case is that one of them is already right while the other is still right about the world it was last told about.

Each record, audited on its own during that stretch, gives a clean answer. The securities are there, so the custody record shows the new count and can prove it. The valuation shows the old price basis and can prove it. The source it reads was publishing that basis when it last read it. Neither record is wrong on its own. The mismatch is therefore invisible from inside either one, and the only check that can catch it is one that reads a count and a price basis at the same instant.

The mismatch is a general shape and worth naming as one. A join error is not a data error. Two clean tables produce a wrong answer when they are multiplied together at a moment when they disagree about which world they are describing. Most of what reconciliation exists to catch has this shape, and reconciliation is covered separately.

How long does the stretch last? The interval between the moment the issuer fixes who is entitled, the moment the securities are credited and the moment the market starts quoting the recut security is fixed by the market regulator, and by whatever settlement arrangements govern the market in which the security is traded, and all three of those move. So it is carried symbolically: call the stretch a fraction f of a year. Every value struck inside f is struck on a broken pairing, and f multiplied by nothing is still nothing, so the fix is to make the pairing atomic rather than to make f small.

Can a scheme be entitled to securities it does not yet hold?

A scheme can be, and for a stretch of every such action that is exactly the position it is in. There is an instant at which the issuer fixes who is entitled, and there is a later day on which the new securities are actually credited. In between, the scheme has an entitlementA settled claim to receive something, existing from the moment it is fixed and before the thing itself has arrived.: a settled claim to something that is not yet in the drawer.

A household knows this state well. The month has been worked, the employer has confirmed the amount, and nothing has landed in the account. Nobody would tell that household it currently has nothing. There is a claim, the claim is firm enough to plan a month around, and all that is outstanding is the transfer. Sitting in that gap, a scheme genuinely has an asset that the register of holdings is structurally unable to display. The register lists what is there, and an entitlement is not there yet.

Which leaves the valuation as the only place it can go. Left out, net assets fall short by the full amount of the claim, and short net assets over the same units give a short figure per unit. Leaving an entitlement out wears the costume of prudence and is the more forgivable slip for that reason. Holding back until the securities turn up feels careful. Careful it is not. The figure comes out wrong in one fixed direction, and people transact against it. A number wrong in one fixed direction does more damage than one that wobbles.

Which entitlement this is matters. The entitlement above is the scheme becoming entitled to something from an issuer. The other entitlement question asks which holders of a scheme are entitled to what the scheme itself distributes, a different cut on a different record, covered separately under the record date. The two are easy to blur and there is nothing gained by blurring them.

How does any of this reach the figure a holder sees?

By one division, always the same one, and this is where the argument rejoins the rest of the sequence. Whatever went wrong upstream, it ends up as a rupee amount by which net assets are misstated. Call that amount E. The published figure per unit is then wrong by E divided by the units in issue. There is no second route and no special case.

Work it on the scheme. Take Rs 4,200 crore, divide by 120.00 crore units, and Rs 35.00 falls out exactly. Now let an action be processed with the count moved and the basis left standing, and let the overstatement that results come to Rs 1.20 crore, or Rs 1,20,00,000/- written out in full rupees. Put that over 1,20,00,00,000 units. The answer is one paise, exactly and not approximately. Numerator and denominator sit a hundred times apart. Rs 35.00 becomes Rs 35.01.

Two of those rows are exact and four are rounded, and it is worth knowing which is which. Rs 35.00, Rs 0.01 and Rs 35.01 are exact. The division works out cleanly both times, 4,200 into 120 and 1.20 crore into 120.00 crore. The average folio does not divide cleanly at all: 120.00 crore units over 3,80,000 folios is exactly 60,000 over 19, a fraction whose decimal never terminates, so about 3,157.89 units is a rounding and is labelled as one. The rupee effect on that folio is exactly 600 over 19, or about Rs 31.58 once rounded. The percentage is exactly one thirty-fifth of one per cent, shown here as 0.02857 per cent.

The table above settles two things, and it does so with no holdings figure anywhere inside it. How big a processing failure is turns out to depend on nothing except how many rupees it left misstated, and any failure of that sort can be sized in a single step, by putting the rupees over the units. The security is irrelevant to that arithmetic. So is the ratio. So is the issuer. Rupees and units are the whole of it, and both are known for this scheme.

Why does the invariance need no issuer and no ratio?

Because conjuring one up would have manufactured the look of evidence and nothing beyond it. There are no securities in the record for this scheme, no ratio attached to any event, and no event either. Answering that gap by inventing an issuer, a quantity and a tidy ratio would have produced a demonstration of numbers made up on the spot, dressed to read exactly like a worked case out of a real book.

Neither the identity nor the sensitivity needs an issuer, a security, a ratio or a specimen holding at any point. The price of that is real. A reader never gets to watch a ratio meet a quantity and see the pieces multiply, and that is a genuine loss in the teaching.

The choice does not cost a single conclusion. The identity works for every factor k, so one chosen k would have illustrated it rather than proved anything. The sensitivity works for every rupee amount E, so one chosen E would have marked a single point on a line that can already be drawn in full. Both arguments were finished before any specimen turned up, and that is the test showing a specimen would have been decoration.

Where do the entitlement dates and the settlement arrangements come from?

Not from here. Settlement of the securities that result follows whatever arrangements govern the market they trade in. Who becomes entitled, and what must go into a record and by when, sit with the market regulator. Each of those is revisable, and a printed date would not simply age on the day it moved. A printed date would be wrong, and wrong is a much worse thing for a reference to be than old.

Routing is therefore the whole answer. The position that applies is read straight off the site of the Securities and Exchange Board of India (SEBI), sebi.gov.in, at the moment of need rather than out of memory. Where a holding sits in dematerialised form, the record of it lives with a depository, and in India there are two of them. One is the National Securities Depository Limited (NSDL), found at nsdl.co.in. The other is Central Depository Services (India) Limited (CDSL), found at cdslindia.com. Both appear for that reason and no other.

Not one bit of that movement reaches the two things established here. The identity in the second part is arithmetic, and no regulator anywhere wrote it. The requirement that a count and a basis travel together follows from that arithmetic rather than from a rule. Alter every date, every settlement arrangement and every recording obligation, and both come through unmarked. Surviving that alteration is what separates a mechanism taught from a procedure recited.

The Girnar Large Cap Equity Fund, Girnar Asset Management Limited, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.