A scrip issue (also called a capitalisation issue or a bonus issue) is the issue of new shares to existing shareholders at no charge, pro rata to their existing shareholdings.
The term capitalisation issue is less common but more accurate than the terms scrip or bonus issue. It reflects what happens in the books of the company. The share capital (on the balance sheet) has to increase by the nominal value of the newly issued shares. This is balanced by an equal decrease in another part of the shareholders' funds, such as retained earnings or a revaluation reserve. This is capitalisation
A scrip issue moves money from one account that belongs to the shareholders to another account that belongs to the shareholders. It is therefore basically a bookkeeping exercise and the value of any shareholding is unchanged by a bonus issue despite the increase in the number of shares held.
Share price charts and other comparisons should be adjusted for the bonus issue. For example, if a 1 for 5 bonus issue has taken place, then prices from before the share went ex-scrip should be adjusted by multiplying by 5/6 in order to make them comparable with the current price.
In spite of being a bookkeeping exercise, a scrip issue can have an impact on the share price for two reasons:
- A scrip issue is a gesture of confidence. The amount available to pay dividends is reduced — therefore it can be inferred that the management of the company is sure that the amount capitalised will not be needed to pay dividends.
- It can improve the liquidity of very high priced shares, if the old share price was so high as to make the trading of small blocks awkward.