Share india bonus issue

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Thus, the legal construct ‘bonus issue’ will have two economic effects: (1) shareholders will get a greater number of shares than their initial investment would have purchased at no additional cost, and (2) the total number of issued shares of the company will go up. Since each shareholder receives bonus shares pro rata to their shareholding, (a) none of the shareholders will get diluted, and (b) while the value of each share would go down, given that there is no dilution and no actual change in the value of the company, the aggregate value of each shareholders’ stake in the company would also not change.

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This article will debate a point of company law: whether a company can do a ‘selective’ issue of bonus shares to just a few shareholders? However, the above examples of permitted selective bonus issue should be taken with a pinch of salt since both were/are geared to benefit minority/retail shareholders and hence had/have the blessings of regulators. They do not give comfort when considering whether a controlling shareholder/financial investor can get away with a selective bonus issue that dilutes the minority or other shareholders. Such selective bonus issuances will come with significant legal risk since the diluted shareholders may question the validity of the bonus issue later on as being oppressive, mala fide, or simply not possible in law. Receive priority invitations to relevant webinars and events © Mondaq® Ltd 1994 – 2022. All Rights Reserved. Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms

Articles tailored to your interests and optional alerts about important changes The question which arises is, can the company issue bonus shares in a ‘selective’ manner i.e., to A only, and not B? In the example of a pro rata bonus issue given above, neither A nor B is diluted. However, in a selective bonus issue, bonus shares would be issued to A only, thereby diluting B and effectively increasing the value of A’s investment in the company. If possible, selective bonus issue could find application in situations where the ownership pattern has to be reset, where a valuation gap needs to be addressed, or where certain shareholders have to be compensated for a drop in the company’s value (anti-dilution rights seen in PE/VC deals come to mind). Email

A few further points should be noted in conclusion: (1) a selective bonus issue to foreign investors to the exclusion of Indian shareholders may be viewed negatively by the RBI for being contrary to the intent of the Foreign Exchange Management Act, 1999, and (2) companies doing a selective bonus issue must be very careful by maintaining a paper trail of consents so that there is no exposure to claims from diluted shareholders at a later point in time, and must also be scrupulous about compliance, so that there is no opportunity for the validity of the bonus issue to be questioned. There are two other factors which support the proposition that a selective bonus issue is possible from a company law point of view: (1) the high-profile precedent of a selective bonus issue which was set when Reliance Power did a selective bonus issue in 2008 (which excluded its promoter) to protect the value of its public shareholders’ investment, and (2) the fact that selective bonus issues are a permitted mechanism for listed companies to bring their shareholding pattern in line with minimum public shareholding norms. Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy. My two cents worth: a selective bonus issuance is indeed possible, and this is largely due to the language now found in Section 63 of the 2013 Act, which begins: “A company may issue fully paid-up bonus shares to its members, in any manner whatsoever…”. Applying the literal rule of interpretation, we can see that the provision does not prohibit selective bonus issue, but rather, contains wide permissive language which suggests it is possible. While the words “in any manner whatsoever” are a little ambiguous, I don’t think there is enough ambiguity to call for the application purposive rules of interpretation which require consideration of the intent behind bonus issue or first principles of company law.

We need this to enable us to match you with other users from the same organisation. It is also part of the information that we share to our content providers (“Contributors”) who contribute Content for free for your use. Company law practitioners seem to be divided on whether a selective bonus issue is possible. Before getting into this debate, it should be noted that the previous company law, the Companies Act, 1956 (the ‘1956 Act’) did not have any provision that expressly dealt with bonus issue, whereas the Companies Act, 2013 (the ‘2013 Act’) does have such a provision – but arguably, still does not adequately address the question of whether a selective bonus issue is possible or not. The views expressed in this article are of the author and not the firm.

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2 thoughts on “Share india bonus issue

  • 01.01.2022 at 14:13
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