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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)

What are scrips?
Scrips are temporary documents or certificates that represent ownership in a fraction of shares, bonds, or a particular entitlement, which are issued by companies and exchangeable for full shares or bonds at a later date.
Why do companies issue scrips?
Companies issue scrips as an alternative to cash dividends or as a response to insufficient liquidity for share repurchases or bonus shares. This allows companies to conserve cash while rewarding shareholders in the form of future investment value.
How can scrips be exchanged for full shares or bonds?
Scrip-holders can accumulate scrips and exchange them for full shares or bonds once a certain threshold is reached. The conversion requirements may vary depending on the company’s policy or terms in a specific transaction.
What is a scrip dividend?
A scrip dividend is a distribution of shares or fractions of shares, represented by scrips, instead of cash dividends to the shareholders. This allows the shareholders to increase their ownership by obtaining more shares in the company instead of a cash payout.
Are scrips transferable?
Yes, some scrips may be transferable and can be traded on the secondary market, allowing the investors to buy or sell to other interested parties.
How are scrips taxed?
The tax treatment of scrips depends on the tax laws and regulations in the investor’s jurisdiction. In some countries, scrip dividends are taxed as income, while in others, they may be treated as capital gains.
What are the advantages of scrips for shareholders?
Shareholders who receive scrip dividends may benefit from increased ownership in the company, potential future capital gains, and the flexibility to either hold onto the scrips or exchange them for full shares or bonds.
What are the disadvantages of scrips for shareholders?
Scrips may not provide immediate liquidity for the shareholder, as they represent fractions of shares or bonds. Additionally, the value of the scrips depends on the performance of the issuing company, which could expose the shareholder to the risk of a decline in the company’s stock or bond value.

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