Bonus Issue

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Bonus Issue

 

Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change.

 

Bonus Issue, which is sometimes referred to as "Scrip Issue" or "Capitalisation Issue", is effectively a free issue of shares - paid for by the company issuing the shares out of capital reserves. 

 

Please note that a Bonus Issue should NOT be seen as a Dividend, like for example a STOCK DIVIDEND event.

A company calls a Bonus Issue to increase the liquidity of the company's shares in the market. Increasing the number of shares in circulation reduces the share price. 

The term 'Bonus Issue' is generally used to describe what is technically a capitalisation of reserves. The company, in effect, issues free shares paid for out of its accumulated profits (reserves). 

 

Theoretical example, company ABC calls a 1 for 4 Bonus issue:

 

  • For every four shares you own in ABC you will receive one additional free share i.e. you will own 5 shares of ABC plc after the issue
  • The number of shares issued increases by 25%
  • The share price adjusts proportionately; if the market price was 100 cents before the issue, it will adjust to 80 cents as the number of shares have increased
  • The Earnings Per Share (EPS) and Dividend Per Share adjust proportionately, but the ratios remain the same
  • The issued share capital increases by 25%, although this is offset by the reduction in the capital reserves.

 

 

Let us say you purchased 1000 shares in ABC plc at 100p per share. For Capital Gains tax purposes, the Bonus shares are treated as the same asset and acquired at the same time as your existing ABC plc shares. There is no immediate liability to CGT when you receive the bonus shares, but there could be a capital gains tax liability when you come to dispose of the shares. In order to determine your capital gains when you come to make a full or part disposal of your ABC plc holding, you need to adjust the base cost of your shares, reducing the cost per share as follows: 

 

Before Bonus Issue you own:

1000 x shares ABC plc @ total cost = £1,000

Base cost per share = 100p

 

In this example, you receive 1 new Bonus Issue share for every 4 shares held. 

If you own 1000 shares, (1000/4 = 250) then you will receive 250 new bonus shares.

 

After Bonus Issue: 

You previously owned 1000 shares in ABC plc which you bought for £1,000. You then received 250 bonus issue ABC plc shares, at no additional cost. And so, pooling the new shares together with your original holding, you now own a total 1,250 shares in ABC plc with total combined cost of £1,000. As you can see the base cost per share is therefore reduced:

 

1250 x shares ABC plc @ total cost = £1,000

New base cost per share = 80p 

 

When you make a full or part disposal of your ABC plc shares, it is the new reduced base cost that you use in your Capital Gain calculations.

 

Example (that happened in reality):

 

RBS 2007 Bonus Issue (source www.rbs.com)

 

The Bonus Issue was approved by shareholders at the Annual General Meeting on 25 April 2007 and took effect on 8 May 2007. It had the effect of lowering the price per share, aligning them closer with the average share prices for FTSE 100 companies and other banking stocks at the time.

 

Why were the Bonus Shares issued?

The Group's share price had been trading for some time at a price which was high relative to the average share price of companies trading on the London Stock Exchange. The directors believed that many shareholders prefer to deal in shares with a lower price per share, which is more in line with the stock market as a whole. Therefore, in March 2007 the directors proposed to adjust the level of the price per share by issuing, by way of a bonus issue, two new ordinary shares for every one ordinary share held by shareholders.

The Bonus Issue was approved by shareholders at the Annual General Meeting on 25 April 2007 and took effect on 8 May 2007. It has had the effect of lowering the price per share, aligning them closer with the average share prices for FTSE 100 companies and other banking stocks.

 

How has this affected the value of my shareholding?

The Bonus Issue should not have affected the overall value of any Group shares you held at close of business on 4 May 2007. Although the value of each share at the start of trading on Tuesday 8 May 2007 will be about one third of its closing value on 4 May 2007, you will now have three times the number of shares than you previously held (See Note for example).

 

 Remember, Group shares will continue to fluctuate in accordance with market factors prevailing at any given time.

 Did I have to do anything to get the Bonus Issue Shares?

No. All shareholders on the Register at close of business on 4 May 2007 (the Bonus Issue Record Date) qualified for the Bonus Issue Shares.

 

 Do I need to keep my old share certificate?

Yes. The existing share certificates are still valid and need to be kept in addition to the new Bonus Issue share certificate due to be sent to you as soon as possible after Monday 14 May 2007.

 

Will I need my old share certificate - I think I've lost it?

Yes. The existing share certificates are still valid and need to be kept in addition to the new Bonus Issue share certificate due to be sent to you as soon as possible after Monday 14 May 2007.

If you have lost your existing share certificate(s), please write to Computershare, quoting your full name and Shareholder Reference Number, company name (RBS) and the number of shares making up the missing certificate.

 

When will CREST accounts be credited?

CREST accounts were credited with the Bonus Issue shares on Tuesday 8 May 2007.

 

When will dealings in the Bonus Issue Shares start?

Dealings in the Bonus Issue Shares commenced on Tuesday 8 May 2007.

 

Note:- Example of how your shareholding has been affected by the Bonus Issue:

For example purposes, let us assume that prior to the Bonus Issue you held 100 RBS Shares.

 

The terms of the Bonus Issue are that for every 1 share you held at close of business on 4 May 2007 (the Record Date), you will have received 2 Bonus Issue Shares.

 

As such, you will now hold three times the number of RBS shares you previously held. In this example, you would now have 300 RBS shares (100 existing shares + 200 Bonus Issue Shares).

 

However, the price of each share will have been lowered by the market to reflect the allocation of the Bonus Issue Shares.

 

END QUOTE FROM www.investors.rbs.com

 

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