Financial Services

Perseverance of “Digital Transformation” In Corporate Actions

Corporate Actions – An Introduction and Purpose

Consider the case of a public limited company that decides to initiate an event that generates a tangible change to its security, equity or debt proceeded by the company. As a mandate, a typical “corporate action” is agreed upon by the company’s board of directors and authorized by its shareholders.

Here are some primary reasons why a public limited company choose corporate actions.

Sway the share price: Price of a stock, irrespective of its changes, has a direct impact on its liquidity. The best example is share buybacks, which influence the stock price. Corporations perform buybacks from the market to increase the share price, and it is directly proportional to a reduction in outstanding shares.

Corporate reforming: Mergers, where companies join powers, and spin-offs, where they break themselves to focus on their core competencies, will necessitate corporate reforming to increase productivity. 

Profit to shareholders: Bonus shares and cash dividends are the two main pillars of corporate actions; in these events, shareholders are rewarded and the stock price tends to go down. However, in rare cases, bonus issues do increase the share price.

Mandatory corporate actions: Shareholder participation is a mandate in a corporate action commenced by the board of directors of an organization. A typical example of mandatory corporate actions are stock splits, acquisitions, company name change, mergers, bond issue, etc. A shareholder is always considered as passive beneficiary in such circumstances.

Voluntary corporate actions: Shareholders can decide to respond to the organization agents for any voluntary corporate action, and the organization in turn sends the proceeds of the decided event back to the shareholders who elect to participate. In a nutshell, shareholders may or may not elect to participate in the action or offer. Typical examples of voluntary corporate actions are DRIP (dividend reinvestment plan), optional dividends, rights issues, etc.

Current Market Survey Trends on Corporate Actions

In the global market, it is estimated that approximately 40 to 50% of the corporate actions are highly manual, and they are either published or received. On an average, the corporate action volume is based on the events introduced and the updates associated. Approximately 200,000 to 300,000 mandatory events are processed by intermediaries via clearing corporations. In the last decade, growth of financial markets and listed companies in the stock exchange have gone up by 30 to 40%. As per existing statistics, corporate actions data is approximately increasing by 10% to 13% per year; this creates a compelling case for bringing advanced digital interventions in corporate actions. However, the question is how.

Industry Challenges in Corporate Action Process

• Event creation: In a corporate action announcement, a major input for event initiation is still not standardized (it is via free format messages and files), which further necessitates manual investigation and verification.
• Accruals (communications): The iterative process of sending notifications and reconciliation with external parties is highly manual.
• Elections process: Untimely elections and unnoticed corporate actions potentially lead to operational inefficiencies and undue financial revelations.
• Events tracking:  Most firms still utilize spreadsheets as a primary tool to keep track of event discrepancies and election instructions post communication with banks.
• Event change mechanism: A change in a corporate action is always dynamic and adds complexity to the existing value chain of corporate action process.

Yes, the word “perseverance” in the blog title reflects the manifestation of continued efforts to bring the best-in-class digital solution to mitigate the challenges mentioned above, despite various hindrances.

Utilizing advanced digital transformation, digitalization composition context can be applied as a solution for the for the top two challenges.

Event creation: A SWIFT message, which is a free format unstructured text, should be read and compared with unstructured corporate action data file before the event creation. The problem statement in this particular use case is dynamic text present in both SWIFT message and corporate action file, where a user must manually understand the event instructions. An advanced digital approach such as NLP (natural language processing) and intelligent document extraction should be the go-to solution for unstructured documents and data. In case of foreign language and free format texts, the go-to solutions should be Google Translator and an ML algorithm (70:30 Success matching criteria rule). These digital interventions result in the reduction in average handling time to up to 30 – 40%, improved accuracy, and standard and cleaner data.

Accruals (communications): Position validation with custodians, traders, and internal teams in corporate actions is completely manual and intense, and require multiple channels of communication. Lately, there were several automations (R language solution for incoming/outgoing emails and documents storage) that eliminated manual communications. However, several exceptions are still unresolved due to dynamic communications. A communication-centric feature integrating email server or host via a secured API and gen AI capabilities, such as chatbot integration with historical data for query types and exception scripts, is the go-to solution for claims notifications, client queries and dynamic interactions. These digital interventions will result in a productivity uplift of 25 - 30%, reduction in potential errors, and creation of better customer experience.

The Way Forward for Financial Institutions

There is a famous quote by Albert Einstein: “Creativity is intelligence having fun”. Even though the messaging standards shift to universal ISO 20022, the so-called end-to-end automation in many cases is unachievable. Organizations and investment managers are moving away from traditional communications, digging deeper gaps in legacy systems and advancing from the limited appetite to a more efficient framework. Such a framework will let the cognitive automations work hand-in-hand with generative AI to bring the best-in-class real-time data to meet client demands. In addition, such digital investments will even reduce operational costs and enable faster response to customers.