Scrip Dividend
A scrip dividend is a corporate action where a company offers shareholders the option to receive additional shares instead of a cash dividend, effectively allowing the company to conserve cash while still distributing value to shareholders.
Scrip dividends are a cash-conservation mechanism used by companies that wish to reward shareholders while retaining liquidity for operations or capital expenditure. Instead of paying cash, the company issues new shares at a price determined by the board—often at or near the prevailing market price or at a small discount—in lieu of the cash dividend the shareholder would otherwise have received.
In India, the scrip dividend as a standalone structure is less common than in the United Kingdom or some other markets, though the underlying economic concept overlaps with bonus issues and dividend reinvestment plans. SEBI's dividend distribution regulations primarily govern cash dividends, and companies that wish to give shareholders a choice between cash and shares typically do so through explicitly structured schemes approved at the board and shareholder level.
When a scrip dividend is declared, shareholders who opt for the scrip option receive a number of new shares computed by dividing the per-share cash dividend equivalent by the issue price of the scrip. If the board declares a scrip equivalent of ₹10 per share and the scrip issue price is ₹200, a holder of 1,000 shares would receive 50 additional shares instead of ₹10,000 in cash.
The tax treatment of scrip dividends in India is a nuanced area. Under the current tax regime post-2020, dividends are taxed in the hands of the shareholder at applicable income tax rates. For a scrip dividend, the question of whether the receipt of shares triggers a tax event, and at what valuation, depends on how the scheme is structured and the specific provisions under the Income Tax Act. Shareholders participating in such schemes are advised to seek specific tax guidance.
From a shareholding perspective, a scrip dividend is dilutive for shareholders who take the cash option, since new shares are issued to those who opt for the scrip. The earnings per share and book value per share are proportionally reduced for existing shareholders unless the company's earnings grow to absorb the higher share count.