Scrip, Bonus & Capitalisation Issues: A Scrip Issue Should Not Be Confused With A)
Scrip, Bonus & Capitalisation Issues: A Scrip Issue Should Not Be Confused With A)
Scrip, Bonus & Capitalisation Issues: A Scrip Issue Should Not Be Confused With A)
A Bonus Issue, which is sometimes referred to as "Scrip Issue" or "Capitalisation Issue", is effectively a
free issue of shares - paid for by the company issuing the shares out of capital reserves. (Please note that
a Scrip Issue should not be confused with a Scrip Dividend).
The general purpose of a Bonus Issue is to increase the liquidity of the company's shares in the market - by
increasing the number of shares in circulation, which has the effect of reducing the share price.
The term 'Bonus Issue' is generally used to describe what is technically a capitalisation of reserves. The
company, in effect, issues free shares paid for out of its accumulated profits (reserves).
For example, let us look at what happens if company ABC plc makes a 1 for 4 Bonus issue, then:
For every four shares you own in ABC plc you will receive one additional free share i.e. you will
own 5 shares of ABC plc after the issue
The share price adjusts proportionately; if the market price was 100 pence before the issue, it will
adjust to 80 pence as the number of shares have increased
The Earnings Per Share (EPS) and Dividend Per Share adjust proportionately, but the ratios
remain the same
The issued share capital increases by 25%, although this is offset by the reduction in the capital
reserves.
Let us say you purchased 1000 shares in ABC plc at 100p per share. For Capital Gains tax purposes, the
Bonus shares are treated as the same asset and acquired at the same time as your existing ABC plc
shares. There is no immediate liability to CGT when you receive the bonus shares, but there could be a
capital gains tax liability when you come to dispose of the shares. In order to determine your capital gains
when you come to make a full or part disposal of your ABC plc holding, you need to adjust the base cost of
your shares, reducing the cost per share as follows:
When you make a full or part disposal of your ABC plc shares, it is the new reduced base cost that you use
in your Capital Gain calculations.
When managing Bonus Issues you are typically told the ratio of old to new shares and you will know the
number of new shares you receive as a result of a Bonus Issue.
Firstly, make sure the original share purchase is listed in your timetotrade share portfolio. As you can see in
the screen shot below, in this example we purchased 1000 shares in ABC plc on 1 Jan uary 2009. For the
purposes of illustration only, we will assume that no commission or stamp duty was paid.
Right Issues & Open Offers
Rights Issues and Open Offers involve shares being offered to existing shareholders at a price, to raise
funds for the company. The need for extra cash may be to fund a take-over, acquire assets, repay debt or
possibly even save the company from bankruptcy. Unlike the other issues discussed, a Rights Issue or
Open Offer cause significant change to the company's cash flow and shareholders have an investment
decision to make as to whether or not they want to take up the Rights Issue or Open Offer. As such a rights
issue requires the publication of what is, in effect, a prospectus, setting out the financial effect of the issue
and the reasons for raising funds.
Click here to view the Rights Issue and Open Offer help video >>
A Rights Issue and Open Offer are used by companies to raise capital by selling shares, however with an
Open Offer you cannot offer to sell the right to buy the shares to anyone else, whereas with a Rights Issue
you can. Another key difference between a Rights Issue and an Open Offer is the Open Offers often enable
you to purchase additional shares over and above your entitlement i.e. an Excess Application.
Let us say you own 1000 shares in a company ABC plc, purchased at 100p per share and currently trading
at 200p per share. The company currently has 1,000,000 shares in circulation and needs to raise £375,000
(before expenses) and so proposes to issue 250,000 new ordinary shares. Existing shareholders are
offered the right to purchase one new share in ABC plc for every four shares they currently hold (ie a 1:4
Rights Issue). And to encourage take up, the new shares are offered to the existing shareholders at a
discounted price of 150p. Rights which are not taken up will be sold for the benefit of the shareholder. The
rights issue has the following effects:
After rights issue = (1,000,000 x 200p) +(250,000 x 150p) = £2,375,000 / number of shares in
issue
Letter of Allotment
The company issues allotment letters to shareholders setting out the details of the new share issue and
informing them of the number of shares to which they are entitled and the cost. If the shareholder wishes to
take up all or part of the rights issue they will accept the allotment by paying for the shares. Payment is
generally due within four weeks of the announcement of the issue. Because the letter of allotment usually
allows the holder to buy shares at below the current market price, it has a value - called the "premium" or
"nil-paid price". Allotment letters are "renouncable" documents - which means investors are able to trade
their right to buy the new issue shares on the market, the shares are referred to as trading "nil paid" until
the right is excercised. In our example you would expect the nil paid price to be approx: 190p - 150p (the
full paid ex-rights price less the amount that must be paid to take up the rights issue) = 40p. The nil paid
price, referred to as the 'premium', has an option element in it. For 40p investors can control, for up to one
month, shares worth 190p, which represents a gearing of 4.75 (190/40). This sometimes results in a high
volume of dealing in the nil paid shares. The owner of the nil paid shares can decide to exercise the right to
purchase, in which case they must then pay the full rights issue price (in this case 150p) for the shares they
have been given the right to buy.
Note: in our example, the nil-paid market price would normally be less than 40p but could be more,
depending on the market's reaction to the rights issue and the publicity surrounding the company's
prospects.
If the shareholder does not accept the letter of allotment or sell their rights nil paid within the allotment
period, then the shareholder loses their rights.
Open Offers
Open Offers are a variation of rights issues and are made to existing shareholders to subscribe for
securities in proportion to their shareholdings. They are not, however allotted on a renounceable document,
so they are not traded on the market except when they are fully listed. Open offers frequently accompany
rights issues and give shareholders the opportunity to subscribe for further shares.
Let us look at the Capital Gains Tax implications of a Rights Issue or Open Offer. The rules differ
depending on whether you decide to take up your Rights Issue or sell the rights nil paid.
Before the rights issue, you own 1000 shares in ABC plc, acquired at a base cost of £1,000
You decide to take up your full entitlement to the new shares, acquiring 250 shares at a cost of
£375.00 (250 x 150p)
This means your total shareholding is increased to 1,250 and the corresponding new cost base for
your total shareholding is £1,375
Your new base cost per share = £1375/1250 = £1.10 per share
Now let us consider the situation if you sold your nil paid rights instead.
The Capital Gains Tax treatment of the sale of the nil paid Rights Issue differs depending on the amount of
cash received from the sale and whether it falls under the classification of "large cash" or "small cash".
it is greater than 5% of the value of the shares at the date of the distribution.
If the cash is classified as "small" then the cost of the original shareholding is reduced by the cash amount
and the tax liability is deferred until the shares are disposed of.
On the other hand, if the cash is classified as "large cash", then there is deemed to have been a share
disposal and as such there is an immediate tax liability. In such an instance, to calculate your tax liability it
is necessary to allocate a cost to the cash received. The cost is apportioned to the cash received in
proportion to: the value of the cash divided by the sum of the value of the cash plus the value of the
associated shares, on the date the cash was received from selling the Rights Issue nil paid.
ie the cost is allocated in proportion to = (value of the cash) / (value of the cash + value of the associated
shares)
Small Cash
First of all let us look at what happens when the cash is classified as a "small cash".
For illustration, using the previous example let us say that instead of taking up your entitlement to the
additional shares, you decide to sell all of your rights nil-paid instead. Let us say you receive 40p per right
nil paid. Based on an entitlement to 250 shares, you receive a cash payment of 40p x 250 shares = £100.
And let us say the share price on the day of the distribution is 200p,
ie total share value of 200p x 1000 shares = £2000.
In order to determine the tax treatment of the sale proceeds, you firstly need to determine if the cash is
classed as "large" or "small".
In this instance the cash would be classed as small as it is less than £3,000. This means that the base cost
of your shares is reduced by the amount of the distribution.
We initially purchased 1000 x shares in ABC plc @ 100p giving total base cost of £1,000.
So following distribution, you own 1000 x shares in ABC plc with deemed base cost of £900,
Average price per share = £900 / 1000
Average price per share = 90p
Large Cash
Now let us consider a situation where the cash distribution is classed as "large".
Using a similar example to previous, say we own 20,000 shares in ABC plc and instead of a 1:4 rights
issue, we'll look at what happens with a 1:2 rights issue.
You decide to sell the rights for 40p per entitlement to each new share instead, receiving a cash payment
of:
40p x 10,000 = £4,000.
The market value on the date before the capital distribution is 200p, ie total market value of shareholding
= 20,000 x 200p = £40,000.
Firstly, we need to calculate if the money received from the sale of the nil paid rights is classed as a "small"
or "large" cash distribution.
In this instance, the distribution is classed as "large" as the cash received is greater than £3,000 and 5% of
the market value of the shares. The market value of the shareholding in ABC plc is £40,000, and the cash
received as a percentage = £4,000 x 100 / £40,000 = 10%, so the cash is treated as a disposal and incurs
an immediate charge to capital gains tax.
We initially paid £20,000 for the shares. The cost of the cash received for the nil paid rights is apportioned
as:
nil paid rights cost base = Initial purchase price x [(value of cash received) / (value of cash received +
market value of original shareholding)]
nil paid rights cost base = Initial purchase price x [£4,000 / (£4,000 + £40,000)]
nil paid rights cost base = £20,000 x 0.090909
nil paid rights cost base = £1818.18
ie, as far as HMRC are concerned you have have disposed of £4,000 of nil paid rights with deemed
acquisition cost of £1,818, giving rise to a capital gain of
You still own 20,000 shares in ABC plc, but the cost of your original share holding is deemed to have
reduced:
new cost base of share holding = Initial purchase price - deemed base cost of cash received
new cost base of share holding = £20,000 - £1,818
new cost base of share holding = £18,182
And the average cost of each share is deemed to have reduced to:
Average cost per share = £18,182 / 20,000 shares
Average cost per share = 90.6p per share
The timetotrade capital reorganisation wizard calculates if the cash received is large or small, apportions
and adjusts cost as necessary and determines the appropriate tax treatment.
We will look at two scenarios, using the examples above: the first where you take up your Rights Issue in
full, the second where you sell the nil paid rights in return for a cash payment.
Using the example above, we will assume you initially purchased 1000 shares in ABC plc on 1 Jan 2009
and that you decide to take up your full entitlement to the rights issue.
Firstly let us look at how to input the Rights Issue if you take up your full entitlement
A company can increase the number of shares already in issue by for example decreasing the par value
from 100 pence to 25 pence through a process referred to as 'share splits'. Typically the reason companies
carry out share splits is to improve the liquidity of a share if the share price is considered too expensive.
Alternatively a share consolidation or reverse share split can be used to increase the value of the share.
Share consolidations are used as a means of making a share more attractive to institutional investors who
consider penny shares too volatile. For example, if a company with 25 pence shares has a one for four
consolidation, the par value would rise to 100 pence. The number of ordinary shares issued would fall to
one quarter of the previous level, and the share price, earnings per share and dividends per share would
rise by a factor of four but the P/E ratio and yield would be unchanged.
For a share split the number of shares that you own are increased and for a reverse share split or
consolidation the number of shares that you own are decreased, however the total value of your
shareholding remains constant. For example if you own 1,000 ordinary shares in Company ABC plc
which were trading at 500 pence before a 2:1 share split (two for one share split i.e. for every one
share you own, you get two shares), after the split you would own 2,000 ordinary shares worth 250
pence each.
The market price of the shares is re-adjusted in proportion to the split. For example if a share was
trading at 800 pence and there was a 4:1 share split, the re-adjusted price would be one quarter of the
original price, therefore 200 pence. Alternatively if there was a reverse share split a share trading at 25
pence before a 1:10 split would have a re-adjusted share price of 250 pence
Per Share ratios such as Earnings per share, Dividends and Asset values per share are restated in
proportion to the split, however a split does not affect for example P/E ratios, yield and market
capitalisation.
There would be no financial impact on the company, other than administration fees, because there
are no cash flow changes involved in executing a share split.
If a stock split results in fractional shares the fractional share is typically sold off either to the
benefit of the company or as cash paid to the investor. For example if you own 100 shares currently
trading at 10 pence, if there is a 1:3 reverse split after the split you would receive 33 shares with a re-
adjusted value of 30 pence plus a fractional one third of a share. The fractional share would typically
be sold at a value of 10 pence i.e. 1/3 of 30 pence.
The split / consolidation are treated as a share reorganisation for capital gains tax purposes, with
the base cost of the existing shares apportioned between the new shares. The new share issue is not
treated as an acquisition and the loss/alteration of existing shares is not treated as a disposal.
timetotrade's portfolio management tools include a Share Reorganisation wizard. Just input the share split
and timetotrade will automatically update your portfolio and make the necessary adjustments to your base
cost for Capital Gains Tax calculations.
To enter a share reorganisation into timetotrade, follow the general instructions defined on the Share
Reorganisation page. This section discusses how to enter specific details relating to share split and
consolidation entries.
When managing share splits or consolidations you are typically told the ratio of old to new shares, or the
number of news share received as a result of a split, or the number of shares cancelled (removed) as a
result of a share consolidation.
Understanding Shares
Splits
What is a split?
When a corporation divides its outstanding shares into a larger number of shares, it is called a
(forward) split.
The purpose of a split is to improve the liquidity of a stock: the more shares in issue, the easier it
A company will sometimes announce a stock split when its share price gets so high that it inhibits
further investment. By dividing the stock, the company cuts the share price and makes the stock
more affordable. In theory a forward split results in a higher number of outstanding shares and a
reduced market price per share. In reality the post-split share price may be bid up or down as a
When a company's stock is trading so low that investors will not touch it, the board of directors
may opt to execute a reverse stock split in an attempt to pump up the stock's market price and
attract the attention of investors. This consolidates the value of the company into a smaller
Again, this kind of split does not alter an individual investor's equity in the company; it merely
changes the number of outstanding shares.
With both (forward) stock splits and reverse stock splits, it is important to remain focused on the
underlying performance of the stock rather than the headline price after the split. It can be difficult
to adjust to this if you are used to keeping track of the stock's performance by referring to the
pre-split price.
Rights issue
A company that wants to raise more capital will sometimes offer new shares to current
The company issues the rights in proportion to existing holdings. For example, in a one-for-two
rights issue, shareholders will be offered the opportunity to buy one new share for every two they
hold. The new shares are generally offered at a significant discount to encourage take-up.
As a shareholder, you are not required to exercise these rights, but if you waive them you risk
diluting your existing holding as the total number of outstanding shares increases.
When a company makes a rights issue, as a shareholder you have three options:
take up your rights and maintain your proportionate ownership of the company.
do nothing and let the underwriter send you the value of your rights minus charges.
If you are thinking about taking up your rights, TD Waterhouse offers its customers a
comprehensive markets and research facility to help you make your decision.
Bonus issue
A bonus issue (or scrip issue) is a stock split in which a company issues new shares without charge
in order to bring its issued capital (outstanding stock) in line with its employed capital (the
increased capital available to the company after including retained profits). This usually happens
after a company has retained profits, thus increasing its employed capital. Therefore, a bonus
issue can be seen as an alternative to dividends. No new funds are raised with a bonus issue.
Free float
Free float (or free capital) is the portion of a company's equity that is available for trading on the
stock market.
Free float can be important in that it affects the liquidity of your stock. If a company only has a
small proportion of its stock available in the market, it becomes more difficult to match buyers and
sellers. The risk with illiquid stock is that you may not be able to buy or sell immediately and at
your chosen price. Also, a scarcity of shares usually pushes the share price upwards.
Free float is particularly relevant to initial public offerings (IPOs) where a small proportion of stock
is released to the public, often in the face of huge demand. The effect on the post-flotation share
price can be dramatic and investors should beware of buying at too high a price.