Understanding Scrip Dividend Scheme better

Previously I shared my choice on the Dividend Reinvestment Plan for OCBC Bank (O39) and CapitaLand Retail China Trust (AU8U)

Scrip dividend scheme or otherwise Distribution Reinvestment Plan (DRP) allows shareholders to opt for dividend payout in the form of shares in lieu of of cash. Existing shareholders could increase their shareholding over time without incurring typical transaction costs in the open market e.g. brokerage commissions, trading fees, stamp duty etc. Scrip dividend price is also usually priced in at a discount.

The company benefits from the cash retained which would otherwise have to be given out as cash dividends. The cash conserved could be further used as working capital or future growth of the company.

Options for shareholders

Most of the time, you only have the option of receiving either cash or shares. Sometimes, a third option allows you to receive part shares, part cash.

Dilution for existing shareholders

Scrip dividend usually leads to the creation of new shares (instead of Treasury shares or shares from the company’s reserve), and is generally a dilution for existing shareholders who opt for cash dividends over scrip.

Treatment of Fractional Entitlements — By issuing Companies

Fractional entitlements are treated differently by different companies. Regular Board lots on the SGX for example are in lots of 100 units. Any shares between 1 – 99 are treat as odd lots. We know that new shares in lieu of the cash amount elected to be received would not be a “nice” number. Usually, it would also include fractional numbers.

3 possible scenarios may arise:

Fractional entitlement is rounded down. Even if you are entitled to 0.99 of a unit share, it will be rounded to zero. E.g. 14.99 shares will be rounded down to 14 shares.

Fractional entitlement is rounded up or down, depending on whether the fraction is 0.5 or more, or less than 0.5. E.g. 14.5 shares will be rounded up to 15 shares, while 14.49 shares will be rounded down to 14 shares.

Fractional entitlement is rounded up. My favorite of the 3 actually. Even if you are entitled to 0.01 of a unit share, it will be rounded up to 1. E.g. 14.01 shares will be rounded up to 15 shares.

Treatment of Fractional Entitlements — CDP versus Custodian

If your shares are held in CDP, generally the treatment of fractional entitlement will follow the rules as set above or the companies.

However, if your shares are held by custodian, generally the rule is that fractional entitlements are rounded down. The reason is simple, the custodian normally hold their shares under a nominee account, thus is treated as a single corporate shareholder rather than many individual shareholders.

In the event that this corporate action (whether voluntary or otherwise) results in you holding a fractional interest in relation to any Security, the total amount of your allocation of such Security will be rounded down to the nearest whole number. — SCB Trading

Some corporate actions may result in fractional shares/CIL. As there are expenses incurred by PSPL in handling such fractional entitlements, your right to any such fractional entitlements will be waived in accordance with the terms governing your account. Your share entitlement from such corporate actions will be rounded down to the nearest full share. — POEMS

Fractional entitlements or shares are shares of equity that are less than one full share. Fractional shares usually arise from stock splits, rights issues and similar corporate actions. Certain corporate action events may result in fractional shares. In such event, your share entitlement will be rounded down to the nearest 1 share. — FSMOne