Share Capitalisation Issues: Ex-scrip price and effects on the Balance Sheet
A case study on Emirates NBD
Capitalisation issues, otherwise known as bonus issues or scrip issues, are shares issued by the company to existing shareholders free of charge.
Although mostly intended to reward shareholders, bonus issues are an effective way for a company to lower its share price in the market without the need for a stock split. Lower share prices mean more liquidity, as high prices can turn small investors away.
Bonus issues are covered in most CISI qualifications in varying depth. Level 2 qualifications introduce to students the concept of bonus issues, while Level 3 & 4 qualifications require further analysis, such as the calculation of ex-bonus price (price after bonus issue) and the effect on a company’s balance sheet (sometimes referred to as the Statement of Financial Position).
In this quick lecture, we shall use Emirates NBD as a case study.
In April 2009, Emirates NBD announced the distribution of 10% (1:10) bonus shares to existing shareholders. It was decided that April 2nd will be the ex-bonus date.
The two most popular questions you’ll get asked in a CISI exam are:
- What is the effect of the bonus issue on the market price?
- What is the effect of the bonus issue on the balance sheet?
The effect on the market price
Market prices drop after the bonus issue. The drop happens on the ex-bonus date, in the same way the price drops on ex-dividend date when there is a dividend distribution.
Before the bonus issue (cum-bonus), the share was trading at AED 3.2.
Where do we expect the price to be after the bonus issue (ex-bonus)?
Before the bonus issue: 10 shares @ AED 3.2 = AED 32
During the bonus issue: 1 share @ AED 0 (free) = AED 0
After the bonus issue: 11 shares = AED 32
The price of the share after the bonus issue is expected to be AED 32/11 = AED 2.9.
This is referred to as Theoretical Ex-Bonus Price.
Indeed, if you see the price of the share on April 3rd, you’ll notice it dropped to AED 2.9.
Sometimes, CISI might give you the ex-bonus price, and ask you to calculate the cum-bonus (price before the bonus).
Example:
Ex-bonus price = AED 5
Bonus issue = 1:10
Find cum-bonus price
Before the bonus issue: 10 shares @ AED x = AED x
During the bonus issue: 1 share @ AED 0 (free) = AED 0
After the bonus issue: 11 shares @ AED 5 = AED 55
The total price for 11 shares was AED 55. The price for 10 shares will also be AED 55 because the additional share was free of charge. This means this price of the share before the bonus was AED 55/10 = AED 5.5
The cum-bonus price is AED 5.5
The effect on the Balance Sheet
A bonus issue will bring no cash to the company. This means the “Assets” side of the Balance Sheet will not change. Consequently, in order to keep the Balance Sheet balanced, the “Equity” side shouldn’t change either.
A bonus issue increases the number of shares in the market. This means an increase in capital.
This additional capital is taken from the Equity Reserves. In CISI qualifications, the reserves used are called “Share Premium Reserves”. In the Emirates NBD Balance Sheet, the reserves used were “Other Reserves”.
Before the bonus issue, Emirates NBD had 5,052,523 shares in the market. The 10% bonus issue (505,252 new shares) brought the number of shares up to 5,557,775.
The nominal value of the shares was AED 1.
Here’s how the Balance Sheet looked like before and after the bonus issue:
| Before Bonus Issue | After Bonus Issue | |
| Capital | 5,052,523 | 5,557,775 |
| Reserves | 3,324,385 | 2,819,133 |
| TOTAL | 8,376,908 | 8,376,908 |
The Capital account went up by AED 505,252, and the Reserves account went down by AED 505,252.
In the end, the total of both remained the same (8,376,908).
In a bonus issue, the capital increases while reserves decrease. Equity in total remains unchanged. Since assets also remain unchanged, this means the balance sheet remains balanced.
References:
Emirates NBD Corporate Actions:
https://www.dfm.ae/en/issuers/listed-securities/securities/company-profile-page?id=EMIRATESNBD
Emirates NBD Balance Sheet and financial statements:
2009 – Q1 (before the bonus issue):
2009 – Q2 (after the bonus issue):
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Other exam articles that you might find useful:
3 mistakes students make when studying for CISI Exams
Managing the Time Value of Money
Identifying and Managing Exposure to Interest and Exchange Rate Risks
The Structure and Function of the Foreign Exchange Market
Inflation, Interest Rates & Forex
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