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scrip-dividend

Scrip issue

A scrip issue is a form of secondary issue. 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. This can have the effect of reducing the income tax liability to the investor. By selling the issue, the investor is making a capital gain rather than receiving income. Since a very low percentage of UK resident investors ever pay capital gains tax, this is often a very tax efficient means of distributing wealth from a company to shareholders.

The UK Society of Investment Professionals (UKSIP) training manual for the Investment Management Certificate, describes the calculation required to predict the ex-scrip price as: "Ordinary shares held multiplied by the Original share price divided by the Total Number of New Shares held".

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