Definition§
A Scrip Issue, also known as a bonus issue or capitalization issue, is a corporate maneuver where a company issues new shares to its current shareholders, free of charge, to reflect the retained earnings or profits accumulated in the reserves on the company’s balance sheet. This strategy converts retained profits into issued share capital without involving any monetary transaction from the shareholders.
Explanation§
Imagine a pizza (your shareholding) that originally has three equal slices (your shares). Now, the company decides to cut each slice into four, giving you an extra slice at no cost for every three you already own. Your amount of pizza hasn’t really changed; it’s just been redistributed to make the slices seem more manageable.
During a scrip issue, if you hold three shares and the company declares a 1 for 3 scrip issue, you receive one additional share for every three shares you own. This does not directly increase the shareholders’ wealth but redistributes the existing equity to more shares, thus decreasing the individual share price typically by a proportional amount (in our example, by 25%).
The allure here isn’t instant fiscal gratification but a psychological and strategic edge. Smaller priced shares are often more liquid and perceived as more accessible by investors, potentially boosting market activity and possibly restoring the share value to its pre-issue levels over time. In the U.S., this process is analogous to a stock split.
Advantages and Disadvantages§
Pros:§
- Increased Liquidity: Lower share prices may enhance trading liquidity.
- Psychological Appeal: More shares can psychologically appeal to shareholders feeling they have “more” and might attract new investors.
- Optimal Pricing: Adjusts share price to a more seemingly attractive level without affecting company valuation.
Cons:§
- Perceived Value: Might create a misconception about the company’s growth.
- Market Misinterpretation: Could be misread by the market as a lack of investment opportunities or cash necessities.
- Administrative Costs: Involves costs relating to the reissuance of shares.
Related Terms§
- Stock Split: U.S. equivalent of a scrip issue where the number of shares increases, but the market cap remains the same.
- Market Capitalization: Total market value of a company’s outstanding shares.
- Liquidity: The ease with which assets can be converted into cash.
- Shareholder Value: The value delivered to shareholders due to management’s ability to increase sales, profits and dividends.
Further Reading§
- “The Intelligent Investor” by Benjamin Graham - A compelling guide on investment principles, including aspects on corporate actions like scrip issues.
- “Security Analysis” by Benjamin Graham and David Dodd - Provides a deeper understanding of the interpretations and implications of various corporate maneuvers including bonus issues.
Using a scrip issue, companies tactfully convert their standing “profits” into fun-sized shares, making everything look chunky yet crispy without costing shareholders a dime. Like a magician pulling more rabbits out of the same old hat, the scrip issue leaves everyone scratching their heads — more shares, but where’s the extra value? Oh, there it is — potentially climbing back up the share price ladder!