Dena Bank, Vijaya Bank investors will receive funds for fractional units

After allotting the shares in the proportion announced, the remaining units pooled and liquidated

Recently, Dena Bank and Vijaya Bank were merged with Bank of Baroda (BoB). Shareholders of Vijaya Bank got 402 equity shares of BoB for every 1,000 shares held. In the case of Dena Bank, its shareholders received 110 shares of BoB for every 1,000 shares.

But rarely a shareholder would have shares in the same proportion decided by the merging entities. What happens to the excess stocks that an investor holds? Say, if an individual owns just 100 shares of Vijaya Bank, what allotment will he be entitled to? “After allocating the stocks based on the decided proportion, the ‘fractional units’ are moved into a trust,” says Venu Madhav, chief operating officer, Zerodha. “All the fractional shares are added up together and then liquidated in the open market. The consideration received is credited directly into the bank account of the shareholder,” he adds.

To put this is number, say, a person holds 1,100 shares of Vijaya Bank. For the first 1,000, he will get 402 shares. For the next 100, the share entitlement comes to 40.2. The company will credit another 40 shares. The remaining 0.2 is called fractional units. The fractional units from all investors are added to a common pool so that it becomes a whole number. Let’s say the fractional units from all investors add up to 2,000 shares. New stocks are allocated, which will be 804 units in the example. These shares are liquidated, and the money is paid to the investors for the fractional units. The same holds true for the demerger process.

If you are holding physical shares of Vijaya Bank or Dena Bank, the same process is followed. The investor will get physical shares in the proportion. The old certificates of Vijaya Bank and Dena Bank will be cancelled. In case there are fractional units, instead of crediting money to the bank account, the shareholder will receive a cheque. “Some companies may courier the new certificates while some may ask the investor to submit it with the registrar to get new certificates. They ask shareholders to submit old share certificates as the addresses of the investors could have changed,” says the head of compliance with a leading broker.

In the case of buybacks, the process is simpler. A company announces the proportion of buyback – say one share for every 10 held. They fix a record date or a book closure date for this corporate action. The company communicates to the shareholders the number of units that are eligible in the buyback offer. Say, a person holds 1,000 shares of which 480 shares are eligible for buyback. The investor can tender 480 shares but it’s not necessary all the units would be purchased. There’s an issue size of a buyback. If the company receives more than the issue size, it may even lower the number of units eligible. In the example, say the company only takes 400 units out of 480 that were eligible and offered. The remaining 80 units are credit back to the demat account of the shareholder.