Bonus Debentures

 

INTRODUCTION

Debentures which can be issued buy a company to its shareholders by using its reserves balances are known as bonus debentures.[1] These debentures are free of cost to the shareholders as there is no cash flow required.[2] Under The Companies Act, 2013 there is no specific provision which deals with the issue of Bonus debentures but the issue of Bonus debentures is stated under Section 391- Section 394 of the Companies Act, 1956.[3]

There are certain problems which are raised. The first problem is related to the lack of provision which is not mentioned under the Companies Act, 2013 and due to which the company’s follow the provisions of the Companies Act, 1956.[4]

CAPITAL REDEMPTION RESERVE AND SECURITIES PREMIUM RESERVE

Bonus debentures can be issued out of the company in general reserves as stated above. Nothing has been stated so far by Indian courts weather the bonus debentures can we should out of Capital redemption Reserve or Securities Premium Reserve.[5] Under Section 69 (1) of the Companies Act, 2013[6], it has been stated that Capital Resumption Reserve can be credited when the company reduces its share capital.[7]

The reduction of share capital is done so that there is proper distribution of profits. This is done to ensure that the creditors are protected even if the company has reduced its share capital.[8] This can be stated in the same way for securities premium reserve which has been stated under Section 52 (1) of the Companies Act, 2013[9], under which to share capital can also be reduced.[10]

Under Section 100 of the Companies Act, 1956[11] there were three conditions for reducing the share capital. The first provision was that there must be such provision mentioned under the Company’s Article of Association.[12]

The second provision was that special resolution must be passed for reducing the share capital and the third provision was that sanction the resolution so passed.[13]

PRINCIPLES RELATED TO THE ISSUE OF BONUS SHARES

As we know that bonus shares and bonus debentures has few similarities. There remains a question whether bonus shares comes under the Section 391 of Companies Act, 2013. There is no pre-express condition while issuing of Bonus debentures. It can also be argued with that there should be no provision under issue of bonus debentures. There are Obligations for the company while issuing the bonus debentures as they has to pay dividend distribution tax, regular and compulsory payment of interest and redemption amount of maturity. t is important to impose precondition upon issue of bonus debentures because they cannot be issued in lieu of payments of debentures.[14]

Through this the interest of shareholders will also be protected who are waiting for the long term benefits. Such a precondition is also required related to the issue of debentures under Section 63 (3) of the Companies Act 2013.[15] Under section 63 (3)[16] “a company cannot issue bonus shares in lieu of payment of debentures”.[17] And this has been done to secure the investors interest by ensuring that the company will not abstain from paying dividends.

ECONOMIC RATIONALE

As stated above that bonus debentures are issued from distributable profits and reserves to the shareholders that are free.[18] Bonus debentures also has face value like every debentures have

Bonus Debentures also has interest and maturity period.[19] There are two types of methods which are usually employed by the company to share its divisible profits which are cash dividend and bonus shares. As we know that cash payment involves immediate payment of cash by the company while issuance of additional shares to the equity investors.[20] The benefit of the cash flow payment is that allows company to outflow.


References

[1] Priya Garg, Bonus Debentures: A New Perspective on Certain Issues and Concerns, http://indiacorplaw.blogspot.in/2016/07/bonus-debentures-new-perspective-on.html.

[2] Id.

[3] Prachi Narayan, Bonus Debentures: Features and ImplicationsBonus Debentures: Features and Implications (2015), http://indiacorplaw.blogspot.in/2015/01/bonus-debentures-features-and.html (last visited Jun 19, 2017).

[4] BHAVANA ACHARYA, All you wanted to know about: Bonus DebenturesAll you wanted to know about: Bonus Debentures, http://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-bonus-debentures/article7000041.ece (last visited Jun 19, 2017).

[5] NALINAKANTHI V, Understanding bonus debenturesUnderstanding bonus debentures, http://premium.thehindubusinessline.com/portfolio/understanding-bonus-debentures/article3848304.ece (last visited Jun 19, 2017).

[6] Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

[7] Supra note 5.

[8] Transfer of certain sums to capital redemption reserve account., Transfer of certain sums to capital redemption reserve account., http://www.advocatekhoj.com/library/bareacts/companies2013/69.php?Title=Companies%20Act,%202013&STitle=Transfer%20of%20certain%20sums%20to%20capital%20redemption%20reserve%20account (last visited Jun 19, 2017).

[9]  Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

[10] Application of premiums received on issue of shares., , http://www.advocatekhoj.com/library/bareacts/companies2013/52.php?Title=Companies%20Act,%202013&STitle=Application%20of%20premiums%20received%20on%20issue%20of%20shares (last visited Jun 19, 2017).

[11] Special resolution for reduction of share capital.

(1) Subject to confirmation by the Court, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality’ of the foregoing power, may–

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up;

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid- up share capital which is lost, or is unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid- up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

(2)  special resolution under this section is in this Act referred to as” a resolution for reducing share capital”.

[12] Section 100 in The Companies Act, 1956, , https://indiankanoon.org/doc/1309415/ (last visited Jun 19, 2017).

[13] Id. 

[14] CA Simarpreet Singh, What are Bonus Debentures? (2014), http://www.moneylife.in/article/what-are-bonus-debentures/39967.html (last visited Jun 19, 2017).

[15] The bonus shares shall not be issued in lieu of dividend.

[16] Id.

[17] Id.

[18] Priya Garg, Bonus Debentures: A New Perspective on Certain Issues and Concerns, http://indiacorplaw.blogspot.in/2016/07/bonus-debentures-new-perspective-on.html

[19] Id.

[20] NALINAKANTHI V, Understanding bonus debenturesUnderstanding bonus debentures, http://premium.thehindubusinessline.com/portfolio/understanding-bonus-debentures/article3848304.ece (last visited Jun 19, 2017).

 

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