Bonus Issue

Shareholders are awarded additional securities – free of payment – in proportion to their holdings. The nominal value of shares does not change and the distributed shares are issued out of the Capital Reserves.

    • A bonus issue of shares, also known as a capitalisation or scrip issue is an issue of new shares to existing shareholders in the same proportion as their existing shareholding. Instead of paying out the company’s profits as dividends, the money is used to pay for additional shares given to each shareholder.
    • 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).
    • Bonus means premium or gift which is normally paid in cash. Bonus shares are a premium or gift which is paid in stock. In the legal context a bonus share is neither dividend nor a gift . It is governed by regulations of the company law that it can neither be declared like a dividend nor gifted away.
    • Issuer
      • The issuer will see securities being debited from their issuer account at the CSD (if they have one). The issued amount of the security will be remain unchanged.
    • Company Registrar
      • The Registrar will need to record all the eligible positions as per close of day Record Date. It will also need to check that the amount of outstanding shares is not larger than the amount of issued shares.
    • Agent Bank
      • The Agent Bank (Paying Agent of the event) will debit the shares to be distributed from the issuer account at the CSD (if they have one). It will often be the Paying Agent who triggers the payment downstream. This means that the transactions will be effected in the accounts of the CSD participants and messaging is sent.
    • Security Identification Provider
      • Numbering Agencies need to update the status of the shares to “Ex-Dividend” or something that reflects that the transaction has taken place.
    • Exchange
      • Any exchange that is listing the security will continue to list the security and see a change in pricing on the Exdate (In theory, price will go down)
    • Index
      • Any index that included the security will continue to include the security in the index. The price of the individual share goes down, but the total Market Capitalisation of the issuer should remain the same.
    • Issuer CSD
      • At CSD level the additional shares need to be booked. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Bonus Issue event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is generated at the issuer CSD and sent down the chain.
    • Global / Direct Custodian / Investor CSD
      • At Custodian level the additional shares need to be booked. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Bonus Issue event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain.
    • Broker Dealer
      • At Broker level the additional shares need to be booked. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Bonus Issue event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain.
    • Stock Lending Broker / Collateral Agent
      • If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transaction in their books. Stock may have to be recalled before the important dates of the event.
    • Fund Manager
      • Fund Manager need to include the change in the fund accounting and possibly in the NAV.
    • Transfer Agent
      • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Dividend.
      • These transactions need to be included in investment statements that are sent to investors also.
    • Data Vendors and Rating Agencies
      • Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it.
    • Retail Bank
      • At Retail Bank level the additional shares need to be booked into Beneficial Owners Accounts. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Bonus Issue event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
      • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)
    • Beneficial Owner
      • Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable)
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    • Geographical Differences
      • There have been geographical differences but with the agreed SMPG guidelines, there should be sufficient clarity on how to process this relatively simple event.
    • Reasons
      • A company can call 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. 
      • Generally, when a company faces liquidity issues or is not in a position to distribute the dividends, it issues bonus shares out of its profits or reserves
    • Purpose
      • An Assimilation event is often used in combination with Interim Lines (also referred to as Dummy Lines), for example when newly issued shares should be excluded from Dividend Entitlement or voting rights for a period of time.
    • Sources
      • We’re stepping well and truly into the realms of accounting here and there may be many geographical differences. But here’s a link to a website that gives a good overview about how it works in India
      • Quote:

        The source of the money can be one of many different company reserves types.

            • Profit and Loss account
            • General Reserves
            • Revenue Reserves
            • Free Reserves
            • Dividend Equalization Fund
            • Capital Reserve
            • Sinking Fund
            • debenture redemption reserve only after redemption
            • development rebate reserve
            • allowance after expiry of 8 years
            • capital redemption reserve
            • share premium or security premium if received in cash

        Unquote

    • CAEV
      • BONU
    • CAMV
      • MAND
    • CAEP
      • DISN
    • CAOP
      • SECU (and CASH for fractions)
    • Qualifier CAEV = BONU 
    • CAOP = SECU 
    • Mandatory event => field 22F: CAMV = MAND

May be scheduled in advance, for example, shares resulting from a bonus may become fungible after a pre-set period of time, or may result from outside events, for example, merger, reorganisation, issue of supplementary tranches, etc.

    • Ex Date
    • Record Date
    • Paydate
    • Seev.031
    • Seev.036
    • Sese.025

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 after the issue

  • The number of shares issued increases by 25%
  • The share price adjusts proportionately; if the market price was 100 pence before the issue, it will adjust to 80 pence 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 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 holding, you need to adjust the base cost of your shares, reducing the cost per share as follows: 

Before the Bonus Issue you own:

    • 1000 x shares ABC plc @ 100 pence per share →  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 the 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.

Open trades that are in “matched” status on Record Date will be compensated, meaning that additional trades will be created to compensate the buyer who is entitled to the additional shares.

    • With ratios often being 1 new for every “n” held, it is likely that there will be many fractional entitlements to the new shares. This applies to both the entitlements on settled balances as of Record Date as well as on Claim Trades. Fractions can be handled in 3 ways and are often only processed at “omnibus account level”:
      • Round Down (SWIFT RDDN)
      • Round Up (SWIFT RDUP)
      • Cash Compensation (SWIFT COMP) → Partial share entitlements are compensated by a cash amount, effected through so called “PFOD” (Payment free of Delivery) trades.

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 the 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 the 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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