User blog: Karim Mansour

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Share Capitalisation Issues: Ex-scrip price and effects on the Balance Sheet

A case study on Emirates NBD

Capitalisation issues, otherwise known as bonus issues or scrip issues, are shares issued by the company to existing shareholders free of charge.

Although mostly intended to reward shareholders, bonus issues are an effective way for a company to lower its share price in the market without the need for a stock split. Lower share prices mean more liquidity, as high prices can turn small investors away.

Bonus issues are covered in most CISI qualifications in varying depth. Level 2 qualifications introduce to students the concept of bonus issues, while Level 3 & 4 qualifications require further analysis, such as the calculation of ex-bonus price (price after bonus issue) and the effect on a company’s balance sheet (sometimes referred to as the Statement of Financial Position).

In this quick lecture, we shall use Emirates NBD as a case study.

In April 2009, Emirates NBD announced the distribution of 10% (1:10) bonus shares to existing shareholders. It was decided that April 2nd will be the ex-bonus date.

The two most popular questions you’ll get asked in a CISI exam are:

1.      What is the effect of the bonus issue on the market price?

2.      What is the effect of the bonus issue on the balance sheet?

The effect on the market price

Market prices drop after the bonus issue. The drop happens on the ex-bonus date, in the same way the price drops on ex-dividend date when there is a dividend distribution.

Before the bonus issue (cum-bonus), the share was trading at AED 3.2.

Where do we expect the price to be after the bonus issue (ex-bonus)?

               Before the bonus issue:                10 shares @ AED 3.2      =            AED 32

               During the bonus issue:                1 share @ AED 0 (free) =            AED 0

               After the bonus issue:                   11 shares                            =            AED 32

               The price of the share after the bonus issue is expected to be AED 32/11 = 2.9.

               This is referred to as Theoretical Ex-Bonus Price.

Indeed, if you see the price of the share on April 3rd, you’ll notice it dropped to AED 2.9.

Sometimes, CISI might give you the ex-bonus price, and ask you to calculate the cum-bonus (price before the bonus).


               Ex-bonus price = AED 5

               Bonus issue = 1:10

               Find cum-bonus price

Before the bonus issue:                10 shares @ AED x          =            AED x

               During the bonus issue:                1 share @ AED 0 (free) =             AED 0

               After the bonus issue:                   11 shares @ AED 5          =            AED 55

The total price for 11 shares was AED 55. The price for 10 shares will also be AED 55 because the additional share was free of charge. This means this price of the share before the bonus was AED 55/10 = AED 5.5

The cum-bonus price is AED 5.5

The effect on the Balance Sheet

A bonus issue will bring no cash to the company. This means the “Assets” side of the Balance Sheet will not change. Consequently, in order to keep the Balance Sheet balanced, the “Equity” side shouldn’t change either.

A bonus issue increases the number of shares in the market. This means an increase in capital.

This additional capital is taken from the Equity Reserves. In CISI qualifications, the reserves used are called “Share Premium Reserves”. In the Emirates NBD Balance Sheet, the reserves used were “Other Reserves”.

Before the bonus issue, Emirates NBD had 5,052,523 shares in the market. The 10% bonus issue (505,252 new shares) brought the number of shares up to 5,557,775.

The nominal value of the shares was AED 1.

Here’s how the Balance Sheet looked like before and after the bonus issue:

                               Before Bonus Issue         After Bonus Issue

Capital                         5,052,523                          5,557,775

Reserves                      3,324,385                          2,819,133

TOTAL                         8,376,908                         8,376,908                                                

The Capital account went up by AED 505,252, and the Reserves account went down by AED 505,252.

In the end, the total of both remained the same (8,376,908).

In a bonus issue, the capital increases while reserves decrease. Equity in total remains unchanged. Since assets also remain unchanged, this means the balance sheet remains balanced.


Emirates NBD Corporate Actions:

Emirates NBD Balance Sheet and financial statements:

2009 – Q1 (before the bonus issue):

2009 – Q2 (after the bonus issue):

This article was originally published on Tadawul Academy’s website

[ Modified: Tuesday, 13 November 2018, 3:05 PM ]


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    by Karim Mansour - Tuesday, 13 November 2018, 2:47 PM
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    Inflation, Interest Rates & Forex

    Relevant to the following CISI qualifications: IISI, Securities, Global Securities, ICWIM, ICAWM.

    The inter-relationship between inflation, interest rates and foreign exchange rates has always been a popular area in CISI exams – with varying difficulty across different levels.
    The recent turmoil in the Turkish Lira provides an excellent case study that would help students understand how the three pillars of monetary policy influence each other.
    Before we begin, it is important to seperate the factors that caused the crisis between economical factors (inflation, interest, fx) and non-economical factors (psychological and religious).


    Economical Factors

    Exports and GDP

    Since July last year, the Turkish Lira has lost 35% of its value against the US dollar. This was mainly attributed to Trump’s tariffs on aluminium and steel which were imposed as a political retaliation for the imprisonment of an American pastor.

    Tariffs on Turkish products will cause American importers to import less from Turkey and source their aluminium and steel from somewhere else. This means lesser exports from Turkey to the USA. If you’ve taken any CISI securities qualification, you’ll know that any adverse changes in exports have a direct effect on a country’s economy (remember: GDP = consumer spending + government spending + investments + exports – imports).

    CISI exam point: negative movements in exports = negative effects on GDP = negative effects on currency

    Interest rates and Inflation

    Turkey’s inflation rates currently stand at an astonishing 15%. For comparison, in the USA, UK and the UAE inflation rates hover around 2%. Turkey has continuously used credit and its budget to stimulate its economy. This meant deficits in its current account and public-sector budget. These deficits were covered through foreign direct investments (FDI) and external borrowing (bond issuance). The yields on Turkish 1-year to 10-year government bonds range between 20% and 25%. Recent growth in income and GDP however was not adequate enough to cover the debt burden.

    CISI exam points: Deficit in current account means imports are higher than exports. Governments cover deficits by borrowing – usually through the issuance of bonds.

    With inflation at such high levels, investors and creditors expected the Turkish central bank to increase interest rates which are already high at 17.75%. Contrary to expectations, the central bank held interest rates at that level. This raised concern among investors who started to believe that the central bank is not serious about controlling inflation and stabilising the currency. These concerns grew when Erdogan appointed his son-in-law to run the Treasury and Finance Ministry.

    CISI exam points: When inflation is high, central banks are expected to interfere and raise interest rates. This will cause borrowing to drop. Consequently, inflation will drop too.

    Non-Economical Factors

    As a conservative Muslim, Erdogan has continuously expressed his loathing for interest rates. On multiple occasions, he’s been quoted saying:

    “If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates.”
    “Because my belief is: interest rates are the mother and father of all evil.”

    Islam considers charging interest on debts as usury, or “riba”, which is therefore prohibited. Therefore, Erdogan’s description of interest rates is literal and not figurative. Investors believe that Erdogan’s lack of understanding of how interest rates influence currency levels stems from his deep hatred for interest – which is not expected to change any time soon.

    This article was originally published on Tadawul Academy’s website

    [ Modified: Tuesday, 13 November 2018, 3:05 PM ]


      Anyone in the world

      The Structure and Function of the Foreign Exchange Market

      Relevant to the following CISI qualifications: IISI, Securities, Global Securities, ICWIM and ICAWM


      The foreign exchange market, also known as the forex, FX, or currency market, involves the trading of one currency for another. Prior to 1996 the market was confined to large corporate banks and international corporations. However it has since opened up to include all traders and speculators. Today, the average daily turnover in forex markets is US$1.9 trillion, according to the Bank of International Settlement’s Triennial Survey. The market is growing rapidly as investors gain more information and develop more interest.

      In trading foreign exchange, investors bet that one currency will appreciate over another; they profit when they bet correctly and collect the profit in the form of an interest rate spread when they return to the original currency. The profit margins are low compared with other fixed-income markets. Large trading volumes can, however result, in very high profits. Most forex trading takes place in London, New York, and Tokyo, with most trading activity in London, which dominates the market at 30% of all transactions. New York’s market share is 16%, and Tokyo’s has fallen to 10% due to the growing prominence of Singapore and Hong Kong. Singapore has become the fourth largest exchange market globally, and Hong Kong is the fifth, having overtaken Switzerland. The various players in the foreign exchange market include bank dealers, 16% of which are international investors and speculators. Banks account for almost two-thirds of forex transactions; of the rest, about 20% is mainly attributable to securities firms that operate in the international debt and equity markets.

      One type of very short-term transaction is the spot transaction between two currencies, delivering over two days and using cash as opposed to a contract.

      In a forward transaction, the money is not exchanged until an arranged date and an exchange rate is agreed in advance. The time period ranges from days to years. Currency swaps are a popular type of forward transaction; these involve the exchange of currency by two parties for an agreed length of time and an arrangement to swap currencies at an agreed later date. Another type is a foreign currency future, which is inclusive of interest. A standard contract is drawn up and a maturity date arranged. The time schedule is about three months.

      In a foreign exchange option (FX option), the most liquid and biggest options market in the world, the owner may elect to exchange money in a designated currency for another currency at an agreed date in the future. This type of transaction depends on the availability of option contracts on an organized exchange. Otherwise, such forex deals may be carried out using an over-the-counter (OTC) contract.


      • The forex market is extremely liquid, hence its rapidly growing popularity. Currencies may be converted when bought or sold without causing too much movement in the price and keeping losses to a minimum.
      • As there is no central bank, trading can take place anywhere in the world and operates on a 24-hour basis part from weekends.
      • An investor needs only small amounts of capital compared with other investments. Forex trading is outstanding in this regard.
      • It is an unregulated market, meaning that there is no trade commission overseeing transactions and there are no restrictions on trade.
      • In common with futures, forex is traded using a “good faith deposit” rather than a loan. The interest rate spread is an attractive advantage.


      • The major risk is that one counterparty fails to deliver the currency involved in a very large transaction. In theory at least, such a failure could bring ruin to the forex market as a whole.
      • Investors need a lot of capital to make good profits because the profit marginson small-scale trades are very low.

      This article was originally published on Tadawul Academy’s website:

      [ Modified: Tuesday, 13 November 2018, 3:06 PM ]