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A scrip issue, also known as capitalisation issue or bonus issue, is a form of secondary issue where a company's cash reserves are converted into new shares and given to existing shareholders. In the United Kingdom, public limited companies, those listed on the London Stock Exchange, have a number of ways to create new shares. A scrip issue is the process of creating new shares which are given free of charge to existing shareholders. To the individual investor, this is known as a scrip dividend. This would normally be done in place of paying a dividend.
The issue would be 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 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 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 USA, where the investor does not pay any tax on receipt of the shares and then only capital gains taxes on the stock dividend until the shares are sold.
- "Definition of 'Bonus Issue'". Investopedia. Retrieved November 26, 2013.