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GEN - General - Market Consultation – 20170210 Treatment of Scrip Dividends
Market Consultation: Treatment of Scrip Dividends
FTSE/JSE Africa Index Series
15 December 2016
1. Introduction
A scrip dividend (SC) is a type of dividend where shareholders may elect to receive either scrip or cash, with a
default option for those shareholders that do not make an election. For shareholders that select the scrip
option, the new scrip is generally issued in a ratio to the scrip already held. Real Estate Investment Trusts (REIT)
have a similar event called an electable REIT distribution (RE). The treatment of SCs and REs in the FTSE/JSE
Africa Index Series is currently different from the standard FTSE Russell treatment applied in the FTSE Global
Equity Index Series and others. FTSE/JSE is seeking to align the treatment of SCs and REs in the Index Series to
the current FTSE Russell treatment.
2. Background
According to the JSE definition, there must always be an election between cash and scrip for an SC or RE to
apply; if not, the event will be deemed to be a Capitalisation Issue (scrip) or a Cash Dividend. The current index
treatment of scrip dividends follows the default option to shareholders, which is announced by the company in
the event announcement. Should cash be the default option, the scrip dividend would be applied as an ordinary
cash dividend and the only impact would be to the Total Return index value. However, should the default option
be scrip, the event would be applied as a Capitalisation Issue in the Index Series. With this treatment the shares
in issue number in the index is increased and the price of the constituent is reduced with an overall market cap
neutral effect. This treatment allows index investors to receive the bonus shares and to hold them in the index
without any trade required.
The standard FTSE Russell index treatment is to apply all SCs or REs as cash dividends regardless of whether
there is a scrip option or even a scrip default. Should the company issue additional shares as a result, these will
be reviewed in line with the index rules, and typically updated in the constituent weighting at the subsequent
quarterly index review.
3. Impact of Scrip Dividend Treatment in the Index Series
Since the FTSE/JSE Index Treatment depends on the default option, the exact treatment is not always apparent
to index investors. For this reason, FTSE/JSE currently publishes an Informative Notice for Large & Mid Cap
constituents informing index investors in advance of the treatment that will be followed in the index.
At an issuer level, it is useful to consider the two election components separately before looking at the
combined index treatment. If all shareholders elect to take the cash, then the company would pay out a
distribution to their shareholders. This would typically result in a decrease in the value of the company, and a
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fall in the share price from when the instrument trades ex-dividend. From a capital index perspective this would
be treated exactly as a cash dividend.
In the event that all shareholders elect to the take up the shares, the company would effectively issue new
shares to all existing shareholders with no distribution or expenditure of cash. This gives each shareholder a
greater number of shares but an unchanged percentage holding and therefore decreased value per share. The
current FTSE/JSE index treatment assumes this 100% scrip take-up scenario and consequently adjusts the index
weights to reflect the increased number of shares held. The index investor would simply elect the scrip option
and hold those shares in the portfolio, with no consideration of the dividend pay-out. When the scrip is the
default option, or a shareholder elects to take the scrip, it is not currently seen as a dividend in index terms, but
rather as a pure scrip distribution, which aligns with the definition of a Capitalisation Issue.
4. Alternative Treatment of Scrip Dividends
The current index treatment is a concern for index derivative traders, who would typically price in a future scrip
dividend as an ordinary cash dividend when valuing the derivative contract. The current index treatment
therefore introduces complexity to the valuations process, since the valuation depends on the default treatment
of the SC.
FTSE/JSE proposes that all SCs and REs are treated as cash dividends in all FTSE/JSE indices, regardless of the
default election option attached to the corporate action. The index treatment would be to apply the dividend at
the declared cash rate. Index investors could either elect to receive the cash, or alternatively receive the scrip
and immediately sell it in the open market to obtain the cash dividend amount. This proposal is supported by
the FTSE/JSE Index Advisory Committee and the JSE Financial Derivatives Advisory Committee.
Note that if most shareholders elect scrip, this would increase the total issued shares of the company. This
would be applied in the index series at the subsequent quarterly index review, and could conceivably lead to a
scenario where an index tracker elects scrip, immediately sells it to realise the dividend, only to repurchase it at
the next index rebalance.
5. Responding to the consultation
FTSE/JSE would like to obtain the view of market participants on changing the way that SCs and REs are treated
in the Index Series, and in particular on the proposal to treat all SCs and REs as Cash Dividends at the declared
rate, regardless of the default option.
It is important to FTSE/JSE to be aware of the impact on clients in terms of trading, administration and taxation,
as well as any unintended consequences. Therefore, FTSE/JSE requests comments regarding the possible impact
of the change and any concerns regarding the change.
Please provide us with your comments and suggestions by Friday, 10 February 2017 to the following email
address: indices@jse.co.za
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All feedback received by 10 February 2017 will be carefully considered before making any final decisions, and
presented to the FTSE/JSE Advisory Committee Meeting in March 2017.
This document is not confidential and should be distributed as widely as possible to all stakeholders.
Yours Sincerely,
Indices Department
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Date: 15/12/2016 10:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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