Scrip Dividend Meaning
Scrip dividend is one of the types of dividends issued by the company to its shareholders in the form of a certificate instead of the cash dividend that provides a choice to its shareholders to get dividends at a later point of time or they can take shares in place of dividends. Companies issue scrip dividends when they do not have a sufficient amount of cash to pay as a dividend. Scrip dividend is also called as liability dividend.
E.g. If a shareholder own 1000 shares and company paid 1 share against 50 shares owned by shareholder then investor will get 20 shares as a scrip dividend.
How to Issue Scrip Dividend?
Let us discuss the process of issuing scrip dividend in detail –
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- First of all, the board of directors will propose a scrip dividend.
- The proposed dividend will be approved by a shareholder in the annual general meeting then only it can be given to shareholders. In AGM shareholders can modify the proposal given by the board of directors.
- In the AGM record date will be finalized.
- Scrip dividends will be issued to only those shareholders who will hold shares as on record date or whose name will appear the share register of the company.
- Now the company will finalize the reference price which is generally five days average of the closing price of the stock according to the stock exchange where stock is listed form the date of ex-dividend.
- Now the company will issue shares to shareholders as scrip dividends as per the below formula.
- After receiving the shares, it will not be taxable at the time of receipt like in cash dividend but it will taxable at the time of sale of shares as capital gain tax which is generally lower than the dividend income tax.
Example of Scrip Dividend
Let’s discuss an example of a scrip dividend.
If a shareholder holds 1000 shares and the dividend per share was $ 20 per share declared by the company and the reference price of the share is $ 800 per share then the shareholder will receive 25 shares under the scrip dividend scheme.
Solution:
Calculation of scrip divided can be done as follows:
- No. of shares held at the record date of Dividends = 1000 Shares
- Cash Dividend per share = $ 20
- Reference Price of Share = $ 800
No. of Shares under Scrip Dividend = 1000 Shares * $ 20 / $ 800 = $ 20000 / $ 800 = 25 Shares
Advantages of Scrip Dividend
Some of the advantages are as follows:
- The company does not require to pay cash immediately or later date if shareholders opt for taking shares and the company can use this cash for capital investment.
- Shareholders can increase the shareholding without incurring any extra transaction cost.
- It will increase the company’s total share capital.
- Shareholders can take the tax advantage if the dividend is in the form of shares.
- The share price will not change much in case of the issue of the scrip dividends.
- This type of dividends gives extra time to the company which is the difference between the dividend declaration date and payments date.
Disadvantages of Scrip Dividend
Some of the disadvantages are as follows:
- It is not a good sign for the company as an investor and other stakeholders will think that the company has a cash flow issue.
- If shareholders are required to pay tax on dividend then they have to sell some shares because in scrip dividend shareholders don’t receive cash.
- If the share price increase then technically the company has to pay an excess dividend as compared to the dividend declared.
- There will be no growth in shareholder’s wealth because earning per share and share price will decrease after scrip dividend issue.
Important Points
Some of the important points are as follows:
- It is one of the types of dividend in which dividend is paid in the form of shares rather than cash.
- It is not taxable at the time of receipt of dividend it will be taxable at the time of sale of shares. It means capital gain tax will be applicable in scrip dividends in case of dividend income tax.
- In this type of dividend company issue promissory notes to the shareholders of the company.
- They create notes payable on which interest will be included or will not be included.
Conclusion
Scrip Dividend is issued by the company in a situation where the company wants to issue dividend but the company does not have the cash for making payment of dividends or the company wants to invest the available cash into the growth of the business, capital expenditure or any other purpose. But at the same time it gives the negative sign to the market about the company and investor does not want to invest in the company because they are not getting cash dividend and they feel their money gets blocked and company financial condition is also not well and company has a cash crunch and sometimes share price of the company is also reduced.
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