Scrip Dividend: Meaning, Calculation and Example

A Scrip Dividend is a corporate action where companies reward shareholders with additional shares instead of cash. It’s commonly used to preserve liquidity while still delivering value to shareholders. This option is often provided during periods of cash constraints or when the company wants to reinvest earnings for growth.

A scrip dividend is a non-cash dividend, where investors receive additional equity shares in the company. It helps companies conserve cash reserves while still offering a return. Businesses often choose this during expansion phases, uncertain markets, or when they prefer to reinvest profits rather than distribute them.

Here’s how scrip dividends are typically executed:

1. Declaration by the company’s board.
   

2. Shareholder option: Investors may be given a choice between cash and shares.
   

3. Share allocation is based on the declared dividend amount.
   

4. Listing of the new shares on the exchange.
   

5. Companies may issue these shares at a discounted price (optional and subject to board approval).

The basic formula:

• Number of Shares = Declared Dividend Amount / Share Price

If a company declares a ₹10 dividend per share and the share price is ₹200:

Scrip Dividend = ₹10 / ₹200 = 0.05 shares per share held

So for 100 shares, an investor would receive 5 new shares.

If a discount is offered on share price (e.g., 10%), the effective price becomes ₹180, and the number of shares allotted increases accordingly.

Consider the following example, suppose:

• Declared Dividend: ₹12 per share
  

• Market Share Price: ₹240
  

• Investor holds 50 shares

Calculation:
12 ÷ 240 = 0.05
0.05 × 50 = 2.5 shares
The investor receives 2 additional shares, and the fractional entitlements are typically handled as per company policy, which may include cash adjustment or rounding rules.

Typical steps include:

• Board approval of the scrip dividend proposal
  

• Regulatory compliance and filing with exchanges
  

• Notification to shareholders
  

• Allocation and crediting of new shares to demat accounts
  

• Listing of new shares post credit

Here’s why companies and investors may favour scrip dividends:

• Helps preserve cash flow for the company.
  

• Increases shareholding proportion of the investor.
  

• Can increase shareholding over time if additional shares appreciate in value.
  

• May be tax-efficient in certain jurisdictions (deferred tax until sale).

Key limitations of scrip dividends include:

• Leads to ownership dilution for all shareholders.
  

• May be viewed negatively by the market if it signals cash shortage.
  

• Can create tax complications depending on jurisdiction.
  

• No immediate liquidity compared to cash dividends.

Scrip dividends can be an efficient way for companies to reward shareholders without impacting liquidity. For investors, they offer growth potential but also come with risks like dilution. Scrip dividends provide an alternative to cash payouts, offering growth potential but also carrying risks such as dilution and tax considerations.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.