EN
A scrip dividend is a form of dividend where a company gives shareholders additional shares instead of paying the dividend entirely in cash. The number of shares received is based on the dividend amount and the applicable share price.
For example, if a company declares a ₹10,000 dividend for a shareholder and offers a scrip dividend at ₹500 per share, the shareholder may receive 20 additional shares instead of ₹10,000 in cash.
Key Takeaways
- Shareholders can choose between receiving immediate cash dividends or increasing their shareholding in the company without paying brokerage fees.
- Companies use scrip dividends to reward shareholders while retaining cash reserves on their balance sheet for capital expenditure, debt reduction, or expansion.
- Shareholders who opt for scrip dividends maintain their relative equity ownership percentage, while those who take cash may face minor ownership dilution.
- If the dividend amount does not divide evenly into full shares, the fractional balance is settled in cash or carried forward.
- In most jurisdictions, including India, scrip dividends may have tax implications similar to cash dividends or shares received through other corporate actions, depending on the applicable tax rules.
How a Scrip Dividend Works?
- Board Declaration: The company's board of directors proposes a dividend and announces a Scrip Dividend Scheme, specifying the terms and reference price for the new shares.
- Calculation of Share Entitlement: The number of new shares a shareholder receives is calculated by dividing the declared cash dividend amount by a reference market price (often the average closing price over a specified period before the election).
- Shareholder Election: Shareholders receive a Scrip Dividend Election Form. They choose whether to take 100% cash, 100% shares, or a combination.
- Allotment & Payout: On the payment date, cash is credited to shareholders who opted for cash, and new shares are credited directly to the Demat/brokerage accounts of those who chose shares.
What are Scrip Dividend Formulas?
- Scrip Dividend Conversion Formula
Scrip Shares Allotted = Total Cash Dividend Declared for Holdings / Reference Share Price
Example
- Shareholder Ownership: 1,000 shares
- Declared Dividend per Share: ₹10 per share
- Total Cash Dividend Due: 1,000 * ₹10 = ₹10,000
- Reference Price for Scrip Shares: ₹200 per share
Calculation:
Scrip Shares Allotted = ₹10,000 / ₹200 = 50 New Shares
If the shareholder elects the scrip option, their total holding increases from 1,000 shares to 1,050 shares, and no cash leaves the company's bank balance for this shareholder.
Advantages & Disadvantages of Scrip Dividends from Company's Perspective
Advantages
- Preserves Cash: Retains valuable liquidity on the balance sheet for operational working capital, debt reduction, or strategic growth projects.
- Avoids Expensive Debt: Allows the business to reward investors without taking on high-interest loans or issuing corporate bonds.
- Positive Market Signal: Demonstrates management's confidence in the company's future equity value and long-term earnings growth.
Disadvantages
- Earnings Per Share (EPS) dilution: Issuing new shares increases the total share count, which can reduce future EPS if earnings growth does not outpace share issuance.
- Higher Administrative Costs: Requires additional legal, regulatory, and compliance overhead to manage election forms and share allotments.
Advantages & Disadvantages of Scrip Dividends from Shareholder's Perspective
Advantages
- Commission-free Reinvestment: Reinvests dividend earnings into additional shares without paying stockbroker commissions or exchange execution fees.
- Automatic Compounding: Accelerates long-term wealth creation by compounding your total equity position over time.
- Financial Flexibility: Lets you choose between immediate cash income and long-term capital accumulation based on your financial needs.
Disadvantages
- Cash Flow Tax Burden: May trigger immediate dividend tax liabilities at your applicable tax slab rate without providing liquid cash to pay the tax bill.
- Ownership Dilution: Choosing the cash payout option while other investors opt for scrip shares can slightly dilute your relative ownership percentage in the company.
SEBI Regulations on Issue of Capital and Disclosure Requirements (ICDR)
- Companies must have sufficient authorised share capital to issue new scrip shares.
- All shareholder entitlements must be treated fairly, and fractional shares must be handled transparently (either consolidated and sold via an appointed trustee or paid out in cash).
Tax Treatment on Scrip Dividend
- Receipt Stage: Under Section 56(2)(i), dividend income (whether received in cash or as scrip/bonus shares) is treated as "Income from Other Sources" and taxed at the shareholder's applicable income tax slab rate.
- TDS Applicability: TDS on dividend income applies at 10% only if the total dividend or Income Distribution cum Capital Withdrawal (IDCW) from a single domestic company or mutual fund exceeds ₹5,000 in a financial year. If valid Permanent Account Number (PAN) details are not furnished, the applicable TDS rate increases to 20%.
- Capital Gains on Sale: Scrip shares are initially taxed as dividend income based on their fair market value when allotted, meaning their cost of acquisition for future capital gains is that same taxed value rather than zero. When sold, Short-Term Capital Gains (STCG at 20%) or Long-Term Capital Gains (LTCG at 12.5% above ₹1.25 Lakh threshold) apply based on the holding period relative to 12 months.
Conclusion
A scrip dividend is a win-win financial instrument when a company needs to conserve capital while continuing to reward its shareholders. It provides investors with automatic dividend reinvestment without transaction friction, allowing them to build long-term equity ownership while giving cash-conscious investors the flexibility to take liquid payouts.
