Scrip issue

A scrip issue is a bonus issue of shares. If they issue more shares, then the nominal value of the equity will increase. If the nominal value of equity increases, then the ratio of debt to equity (on nominal values) will fall.

But isnt bonus issue basically a transfer of reserves to share capital ? Then how would the total equity change?

Yes it is a transfer of reserves and therefore the total equity (and hence the gearing ratio) will not change. It depends on the exact wording of the question. If the question is simply asking for the gearing ratio then that will not be affected.

@rihaam said: Can u please explain me how would scrip issue reduce the debt equity ratio(nominal value basis)?

So that means debt equity ratio ( nominal value basis ) wont change. But the sad fact is this is what is given in the book

I can't defend what it written in your book! Are you sure that your book is not referring to a scrip dividend? If comparing a scrip dividend with a cash dividend, then the resulting gearing ratio will be lower with a scrip dividend than it would have been with a cash dividend. With a cash dividend, equity (including reserves) will be reduced. With a scrip dividend, equity stays the same (higher share capital, lower reserves). So the statement in your book would be correct if it was comparing the effect on gearing of a scrip dividend as opposed to a cash dividend.

Ok that makes it much more clear. Thank you so much.

You are welcome :-)