Stocks and shares: valuation: capitalisation issues
When a company builds up a reserve of capital it may decide to issue additional shares to its existing shareholders free of charge. This is called a capitalisation issue.
Anna holds 1,000 £1 shares in a company with an issued capital of £100,000 in £1 shares and reserves of £250,000. The company makes a 1 for 1 capitalisation issue. It issues a £1 share, from its reserves, for every share held. After the capitalisation issue Anna has 2,000 £1 shares in a company with an issued share capital of £200,000 and reserves of £150,000.
On the first day on which dealing in the ‘new’ shares begins on the stock exchange, the quotation of the ‘old’ shares is adjusted to exclude the benefit of the new shares. The ‘old’ shares are marked XC on the London Stock Exchange listings (IHTM18092).
- If shares are sold before the XC marking, the purchaser is entitled to the new shares.
- If they are sold after the XC marking, the original owner is entitled to the new shares.
- If the shares are marked XC at the date of death, the estate is entitled to the ‘new’ shares and these should be included in the account.