Scrip Issue

Detailed Definition

A scrip issue (also referred to as a bonus issue, capitalization issue, or free issue) is a method used by companies to issue new shares to existing shareholders without any additional cost. This procedure reflects the conversion of a company’s reserves into issued share capital, thus increasing the total amount of issued shares while proportionally reducing the share price.

A scrip issue is typically approached by distributing additional shares to existing shareholders based on their current holdings. For instance, in a 1-for-3 scrip issue, shareholders receive one additional share for every three shares they currently hold. The immediate effect is a decrease in the share price, maintaining the value of the shareholders’ investments theoretically unchanged, though it is often anticipated that the share price will incrementally climb back to its prior level.

Examples

1-for-4 Bonus Issue: A company announces a 1-for-4 bonus issue. If a shareholder holds 400 shares, they receive an additional 100 shares, increasing their total holdings to 500 shares.
2-for-5 Bonus Issue: In a 2-for-5 bonus issue, a shareholder with 500 shares would receive an extra 200 shares, bringing their total to 700 shares.

Frequently Asked Questions (FAQs)

What is the purpose of a scrip issue?
- The primary purpose is to capitalize the company’s reserves to reflect profits in the form of issued shares. It often helps improve investor sentiment by increasing shareholder holdings without additional capital investment.
Will my shares dilute in value after a scrip issue?
- Although the price per share typically decreases proportionally based on the additional shares issued, the total value of holdings should, in theory, remain the same immediately post-issue.
Are there any taxes applicable on a scrip issue?
- Tax implications of receiving bonus shares vary by jurisdiction and specific tax laws. Always check with a tax advisor to understand the personal tax implications.
How does a scrip issue differ from a stock split?
- In the USA, a similar concept is known as a stock split. A scrip issue involves distributing new shares from reserves, whereas a stock split involves dividing current shares into smaller units without affecting reserves.
Can a company do a scrip issue more than once?
- Yes, companies can issue scrip multiple times depending on their reserve levels and strategic needs.

Stock Split: The action of dividing each share into multiple smaller shares, increasing the number of shares outstanding while decreasing the share price proportionately.
Nominal Value: The face value of a security as stated by the issuer.
Dividends: Payments made to shareholders from a company’s profit, often distributed quarterly.
Capital Reserves: Retained profits that a company has set aside for long-term funding needs or investment.

Online References

Suggested Books for Further Studies

“Financial Statement Analysis and Security Valuation” by Stephen H. Penman.
“Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott.
“Fundamentals of Financial Management” by Eugene F. Brigham and Joel F. Houston.

Accounting Basics: “Scrip Issue” Fundamentals Quiz

### What is the primary reason for a company to undertake a scrip issue? - [ ] To dilute shareholder gains - [x] To reflect accumulated profits as issued capital - [ ] To reduce the overall share count - [ ] To issue debt > **Explanation:** A scrip issue is primarily undertaken to reflect accumulated profits in the reserves as issued capital, often resulting in an increase in the number of issued shares without directly impacting cash flows. ### How does a scrip issue affect the share price of the company's stocks? - [x] The share price decreases proportionally - [ ] The share price increases sharply - [ ] The share price remains the same - [ ] There is no effect on the share price > **Explanation:** In a scrip issue, the price per share decreases proportionally to the number of additional shares issued, although the total market capitalization of the company remains the same. ### Is additional capital required from shareholders in a scrip issue? - [ ] Yes, shareholders need to invest more capital. - [x] No, shareholders do not need to pay any additional capital. - [ ] Only under specific conditions - [ ] Yes, for half of the new shares issued > **Explanation:** Shareholders do not need to invest additional capital for new shares received through a scrip issue; the new shares are distributed based on current holdings. ### What could potentially happen to the share price after a scrip issue in the long term? - [ ] The share price will decline continuously - [ ] The share price remains constant - [x] The share price might gradually increase towards its former value - [ ] The share price will never change post-issue > **Explanation:** The share price might gradually increase towards its former value if investor sentiment is positive and the company's financial performance remains strong. ### What is another common term for a scrip issue used in the USA? - [ ] Dividend Reinvestment - [x] Stock Split - [ ] Share Conversion - [ ] Capital Call > **Explanation:** In the USA, a scrip issue is commonly referred to as a stock split, although the mechanics in accounting terms may slightly differ. ### Are scrip issues and stock splits fundamentally the same? - [x] No, they have different accounting treatments - [ ] Yes, they are exactly the same - [ ] Scrip issues require shareholder payment while stock splits do not - [ ] One is beneficial while the other is not > **Explanation:** Although scrip issues and stock splits both result in additional shares being issued to shareholders, their accounting treatments differ. Scrip issues capitalize retained earnings, while stock splits divide existing share structures. ### For a 1-for-4 scrip issue, how many shares will a shareholder with 100 shares receive additionally? - [x] 25 additional shares - [ ] 50 additional shares - [ ] 100 additional shares - [ ] None, scrip issues distribute dividends > **Explanation:** In a 1-for-4 scrip issue, a shareholder with 100 shares would receive an additional 25 shares. ### What does a scrip issue primarily change in the financial statements? - [ ] The amount of cash reserves - [x] The composition of issued share capital and reserves - [ ] The total debt of the company - [ ] The shareholder equity > **Explanation:** A scrip issue changes the composition of issued share capital and reserves by transferring amounts from retained earnings to share capital; it does not directly affect the shareholder equity section in nominal terms. ### Can a company issue a scrip issue without any profits? - [ ] Yes, scrip issues can be issued at any point. - [x] No, scrip issues reflect accumulated profits. - [ ] Yes, but only with shareholder approval - [ ] No, it undermines shareholder value > **Explanation:** Scrip issues are typically dependent on the company having accumulated profits in reserves, as it involves converting retained earnings into issued share capital. ### In the market, how is a positive response demonstrated to a scrip issue? - [ ] By maintaining the lower share price - [ ] By selling off shares post-issue - [x] By an increase in demand causing share prices to rise gradually - [ ] By decreasing the number of issued shares > **Explanation:** A positive market response to a scrip issue is often demonstrated through an increased demand for shares, potentially leading to a gradual rise in share prices towards their former levels.

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