corporate finance Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...

, a scrip issue, also known as capitalisation issue or bonus issue, is the process of creating new shares which are given free of charge to existing

shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...

s. It is a form of secondary issue where a company's cash reserves are converted into new

shares In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...

and given to existing

s, or an issue of additional shares to shareholders in proportion to the shares already held. A scrip issue is usually done when a company does not have sufficient liquidity to pay a cash dividend. A company declaring a ''scrip dividend'' gives the shareholders the option to either receive the dividend in cash or to receive additional shares. This is different than a bonus issue as shareholders do not have a choice with a bonus issue event. Scrip dividends are in some ways similar to DRIPs as they give the shareholders the option to receive the dividend in cash or stock. Unlike DRIPs, however, scrip dividends are exempt from stamp duty and not subject to brokerage / dealing fees, because they are considered a stock issue by the company and not a reinvestment by the shareholder. The issue is calculated relative to existing holdings. This means that, for example, one new 'scrip' share may be issued for every ten shares currently owned. The

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...

issuing the scrip shares has now expanded the number of shares in existence, but not increased the value of the company. This means that the relative value of each pre-existing share has been reduced slightly. The investor has the right to sell the new

scrip A scrip (or ''chit'' in India) is any substitute for legal tender. It is often a form of credit. Scrips have been created and used for a variety of reasons, including exploitive payment of employees under truck systems; or for use in local comme ...

shares in the market. However, the investor must still report the cash value of the scrip dividend on his tax return like a normal cash dividend. This differs from a stock dividend in the United States, where the investor does not pay any tax on receipt of the shares and then only

capital gains Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...

taxes on the stock dividend until the shares are sold.

References

Stock market Dividends {{economy-stub

See also

References