Scrips

Definition

Scrips are temporary certificates or documents that represent a portion of a share, often issued after a stock split or when replacing old shares with new ones. They can be used to obtain fractional shares or be combined with other scrips to form a whole share. Scrips are typically exchangeable for a full share once the holder accumulates enough of them to form a complete share.

Phonetic

The phonetic representation of the keyword “Scrips” is: /skrɪps/

Key Takeaways

1. Scrips refer to various forms of substitute currency, often used in lieu of legal tender, and are issued by companies, local governments, or other organizations.
2. Historically, scrips gained popularity during difficult economic times or in remote locations, serving as an alternative means of exchange to promote local trade and economic activity.
3. While scrips are generally not widely accepted and may not have long-term value, they continue to serve specific purposes in today’s world, such as gift certificates, store credit, or online tokens in digital platforms.

Importance

Scrips are important in the business and finance realm as they represent a temporary document or certificate that can be exchanged for a fraction of a share or a new share when it becomes available. They often arise during corporate actions, such as stock splits, rights issues, or dividend payments, in which the company might issue scrips instead of cash or fractional shares. By issuing scrips, companies can conserve cash, enhance liquidity, and encourage long-term investments. Investors may use scrips to accumulate additional shares or sell them to others, gaining financial benefits from the growth and development of the company. Overall, scrips play a vital role in corporate finance, promoting flexibility in transactions and serving as an alternative instrument for both companies and shareholders to achieve their objectives.

Explanation

Scrips serve as a valuable tool in the world of finance and business, enabling companies to navigate difficult periods as well as to execute strategic transactions without affecting their cash reserves. These temporary documents or certificates represent a claim for securities or cash to be issued in the future, usually after a specified event has occurred. For instance, when a publicly-traded company goes through a stock split, it may issue scrips as placeholders to facilitate the smooth transition and record-keeping of the new shares. In addition, scrips can be utilized to enable the payment of dividends in the form of additional shares rather than cash, thereby allowing businesses to conserve valuable resources during times of financial restraint. Another significant use of scrips is in the context of fundraising through rights issues, where companies issue these certificates to existing shareholders to grant them the option to purchase additional securities at a discounted price. This mechanism allows investors to maintain their proportionate ownership in the firm while contributing additional capital to help the business expand, reduce debt, or finance new projects. Moreover, scrips can be employed to optimize the execution of mergers and acquisitions by permitting the swapping of targeted company shares for the acquiring entity’s scrips – an approach that can minimize the financial burden on both parties. Overall, scrips play a versatile role within the corporate finance landscape, enabling efficient and tailored responses to various business needs and market evolutions.

Examples

1. Dividend Scrip: A real-world example of the business term ‘scrip’ can be seen in the form of dividend scrips issued by companies to their shareholders. In 2013, food and beverage giant Nestlé offered a scrip dividend to its shareholders as an alternative to receiving cash dividends. Shareholders could opt for new Nestlé shares instead of cash, thereby investing the value of the dividend back into the company. 2. Pharmacy Benefit Management Scrip: In the pharmaceutical industry, Pharmacy Benefit Managers (PBMs) utilize ‘scrip’ in managing prescription drug distribution to pharmacies and patients. For instance, a company like Express Scripts (now part of Cigna) works with pharmacies, drug manufacturers, and health plans to ensure patients receive the right medications at the best available prices. Express Scripts acts as a middleman and negotiates on behalf of insurance companies and employers to control the cost of prescription drugs. 3. Scrip in Multi-Level Marketing (MLM) schemes: Some multi-level marketing (MLM) companies use a combination of cash and scrip rewards to incentivize their distributors. One example is Lyoness, an Austrian cashback and loyalty program. It provides cashback and shopping points (referred to as ‘scrip’) that can be redeemed for further purchases or discounts. Distributors are encouraged to participate in the program and refer others to expand their network, earning rewards in the form of cash and scrip in the process.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Dividend Reinvestment Plan (DRIP)
• Stock Split
• Share Certificate
• Rights Issue
• Equity Warrants

Sources for More Information

• Investopedia – Scrip
• Nasdaq – Scrip Glossary Entry
• ClearTax – Sciprs
• Corporate Finance Institute – Sciprs