Scrip Dividend Meaning
Scrip dividend, also known as liability dividend, are 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 such dividends when they do not have a sufficient amount of cash to pay as a dividend.
E.g., A shareholder owns 1000 shares, and the company paid 1 share against 50 shares owned by a shareholder. Here the investor will get 20 shares as a scrip dividend.
How to Issue Scrip Dividend?
Let us discuss the process of issuing this dividend in detail –
- 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 presented by the board of directors.
- In the AGM record date will be finalized.
- They 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 will be at the time of sale of shares as capital gain tax, which is generally lower than the dividend income tax.
Example of 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.
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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
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 payment date.
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 dividends, then they have to sell some shares because, in this 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 the scrip dividend issue.
Some of the essential 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.
- Scrip Dividend is not taxable at the time of receipt of dividends. It will be taxable at the time of sale of shares. This 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.
Scrip Dividend is issued by the company in a situation where the company wants to issue a 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 the company has a cash crunch and sometimes share price of the company is also reduced.
This has been a guide to what is scrip dividend and its meaning. Here we discuss how to issue scrip dividends along with an example, advantages, and disadvantages. You may also take a look at some of the useful economics articles here:-