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Sources of Finance

Bonus, Scrip or Capitalisation Issue

In the table that follows, we see that Tesco, along with many other companies, has had a scrip issue. A scrip issue is also known as a bonus or capitalisation issue. With a scrip or bonus issue, a company transfers profits to a fund called its capital redemption reserve and uses it to issue bonus shares to the members in proportion to their existing holdings.

One effect of a bonus issue is that it can reduce the amount of money available for paying dividends, so the term bonus is not always appropriate and that is why the term capitalisation of reserves is sometimes used. A company can also use a capitalisation issue to credit partly paid shares with further amounts to make them paid up. For example, imagine that we have the following situation:

The company now decides to transfer £25,000 from retained profits to the ordinary share capital account. The balance sheet looks like this now:

It's just a bookkeeping transaction but the effect is that the shareholders do not now need to pay any more money into the company. No cash changes hands with a bonus issue.

A rights issue, on the other hand, is a cash transaction. With a rights issue of shares, existing shareholders are given the right, or strictly speaking the first refusal, to buy new shares that the company is issuing. The rights issue is normally made in proportion to existing shareholdings so that if I currently own, say, 10% of all issued shares, I will be offered the right to buy 10% of the newly issued shares. There is a numerical example of a rights issue below.

The following table illustrates the terms authorised, issued and called up share capital for Tesco plc:

Source: Tesco Plc Annual Report and Financial Statements 2002, Page 34

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