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    Sebi Bonus Shares ND Debentures

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    Sebi Bonus Shares ND Debentures

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    nemewep527
    5 views6 pages

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    sebi bonus shares nd debentures

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    Sebi Bonus Shares ND Debentures

    Uploaded by

    nemewep527

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    © All Rights Reserved
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    of 6

    The following circumstances warrant the issue of bonus shares :

    (i) When a company has accumulated large reserves (whether


    capital or revenue) and it wants to capitalize these reserves by
    issuing bonus shares,

    (ii) When the company is not in a position to give cash bonus


    because it adversely affects its working capital.

    (iii) When the value of fixed assets far exceeds the amount of the
    capital.

    (iv) When the higher rate of dividend is not advisable for the
    distribution of the accumulated reserves because shareholders will
    demand the same rate of dividend in future which the directors may
    not be able to give. To obviate this difficulty, bonus shares are
    issued to facilitate the payment of the regular dividend from year to
    year.

    (v) When there is a big difference between the market value and
    paid up value of shares of the company i.e., market value of shares
    far exceeds the paid up value of shares.

    A company issuing bonus shares is better placed in the market.


    There is a sharp rise in the prices of equity shares following the
    declaration of bonus issue.

    SEBI (i.e., Securities and Exchange Board of India)


    Guidelines for Issue of Bonus Shares
    The company shall, while issuing bonus shares, ensure the following
    :

    (a) The bonus issue is made out of free reserves built out of the
    genuine profits or securities premium collected in cash only.

    (b) Reserves created by revaluation of fixed assets are not


    capitalized.
    (c) The declaration of bonus issue, in lieu of dividend, is not made.

    (d) The bonus issue is not made unless the partly paid shares, if any
    existing, are made fully paid-up,

    (e) The company has not defaulted in payment of interest or


    principal in respect of fixed deposits and interest on existing
    debentures or principal on redemption thereof and has sufficient
    reason to believe that it has not defaulted in respect of the payment
    of statutory dues of the employees such as contribution to provident
    fund, gratuity, bonus etc.

    (f) A company which announces its bonus issue after the approval of
    the Board of Directors must implement the proposal within a period
    of six months from the date of such approval and shall not have the
    option of changing the decision.

    (g) There should be a provision in the Articles of Association of the


    company for capitalization of reserves, and if not, the company shall
    pass a resolution at its general body meeting making provisions in
    the Articles of Association for capitalization.

    (h) Consequent to the issue of bonus shares if the subscribed and


    paid-up capital exceed the authorized share capital, a resolution
    shall be passed by the company at its general body meeting for
    increasing the authorized capital.

    (i) The company shall get a resolution passed at its general body
    meeting for bonus issue and in the said resolution the
    management’s intention regarding the rate of dividend to be
    declared in the year immediately after the bonus issue should be
    indicated.

    (j) No bonus issue will be made which will dilute the value of rights
    of the holders of debentures, convertible fully or partly.

    No Company shall, pending conversion of fully convertible


    debentures/partly convertible debentures, issue any shares by way
    of bonus unless similar benefit is extended to the holders of such
    fully convertible debentures/partly convertible debentures through
    reservation of shares in proportion to such convertible part of fully
    convertible debentures/partly convertible debentures. The shares so
    reserved may be issued at the time of conversion(s) of such
    debentures on the same times on which bonus issues were made to
    shareholders.

    Note. Entries for bonus shares reserved for convertible debentures


    are not to be passed when bonus shares are issued to shareholders.
    Entries for such reserved] shares will be recorded only when these
    will be issued to convertible debenture holders in the same way as
    are passed in case of bonus shares issued to shareholders.

    As per SEBI guideline J (a), no bonus issue shall be made within 12


    months of any ‘ public/right issue.

    SEBI guidelines are silent on ratio of bonus issue. Therefore, a


    company can issue
    bonus shares in any ratio.

    Clarification to SEBI Guidelines


    A company issuing bonus shares shall forward a certificate duly
    signed by the issuer and duly countersigned by its statutory auditor
    or by a company secretary in practice to the effect that the terms
    and conditions for issue of bonus shares as laid down in SEBI
    guidelines, have been complied with.

    A clarification issued by SEBI on 16-7-1992 states that the share


    certificate to be issued pursuant to bonus issue shall be issued as far
    as possible in marketable lots and in respect of the balance, the
    certificate may be issued in denominations of 1, 5,10 and 50 shares.

    Reserves:
    Free Reserves that can be Used for Issue of Bonus Shares :
    1. Surplus in Profit and Loss Account (i.e., credit balance of Profit
    and Loss A/c carried forward).

    2. General reserve

    3. Dividend equalization reserve.


    4. Capital reserve arising from profit on sale of fixed assets received
    in cash.

    5. Balance in debenture redemption reserve after redemption of


    debentures.

    6. Capital Redemption Reserve Account created at the time of


    redemption of redeemable preference shares out of the profits.

    7. Securities Premium collected in cash only.

    It may be remembered that both the above accounts can be utilized


    only for issuing fully paid bonus shares and not for making partly
    paid shares fully paid shares. . .

    Reserves (i.e., not Free Reserves) not available for Issue of


    Bonus Shares are:
    1. Capital reserve arising due to revaluation of assets.

    2. Securities premium arising on issue of shares on amalgamation


    or lake over.

    3. Investment allowance reserve/Development rebate reserve before


    expiry of 4 years of creation.

    4. Balance in debenture redemption reserve account before


    redemption takes place.

    5. Surplus arising from a change in the method of charging


    depreciation

    1. Provision in AOA for issue of Bonus Share: The Articles of the Association of
    the company should contain provisions for the issue of bonus shares. In the
    absence of such provisions in the Articles, the company should pass
    a resolution to that effect at the general body meeting.
    2. Issue of Bonus Share: Bonus issue is capitalization of profit. Bonus shares
    should be issued from free reserves created out of genuine profits or share
    premiums collected.
    3. Capitalization of reserve: Any reserve created through revaluation of fixed
    assets cannot be capitalized.
    4. Issuing Bonus: Bonus shares cannot be issued in lieu of dividend.
    5. No Partly paid-up shares: At the time of issuing bonus shares, there
    should not be partly paid up shares.
    6. Payment of statutory dues: There should not be any default on the part of
    the company in payment of statutory dues to employees such as provident
    fund, gratuity, bonus, etc. Similarly, there should not be default in payment
    of interest on fixed deposits or interest or principal amount thereof.
    7. Bonus vs Right issue: There should be a gap of at least 12 months between
    the public or right issue and bonus issue.
    8. Proposal of bonus issue: The proposal of bonus issue must be
    implemented within six months from the date of such approval by the
    Board of Directors.
    9. If the issue of bonus shares results in excess of subscribed and issued
    capital over the authorized capital, a resolution will be passed at the general
    body meeting for increasing the authorized capital.

    10. No bonus issue will be made if it dilutes the rights of debenture holders
    whose debentures are convertible fully or partly.

    Guidelines of SEBI for the issue of debentures


    1. Guidelines will be applicable for the issue of convertible and nonconvertible
    debentures by public limited as well as public sector companies.
    2. Debentures can be issued for the following purposes:

     For starting new undertakings


     Expansion or diversification
     For modernization
     Merger/amalgamation which has been approved by financial institutions
     Restructuring of capital
     For acquiring assets
     For increasing resources of long-term finance.
    3. Issue of debentures should not exceed more than 20% of gross current
    assets and also loans and advances.

    4. Debt-equity ratio in issue of debentures should not exceed 2:1. But this
    condition will be relaxed for capital intensive projects.

    5. Any redemption of debentures will not commence before 7 years since


    the commencement of the company.

    6. For small investors for value such as Rs. 5,000, payments should be
    made in one installment.

    7. With the consent of SEBI, even non-convertible debentures can be


    converted into equity.
    8. A premium of 5% on the face value is allowed at the time of redemption
    and in case of non-convertible debentures only.

    9. The face value of debenture will be Rs. 100 and it will be listed in one or
    more stock exchanges in the country.

    10. Secured debentures will be permitted for public subscription

    SEBI’s Guidelines

    Securities and Exchange Board of India (SEBI) has issued guidelines for
    redemption of debentures. The salient points of these guidelines are: 1.
    Every company shall create Debenture Redemption Reserve in case of issue
    of debenture redeemable after a period of more than 18 months from the
    date of issue. 2. The creation of Debenture Redemption Reserve is
    obligatory only for non-convertible debentures and non-convertible portion
    of partly convertible debentures. 3. A company shall create Debenture
    Redemption Reserve equivalent to at least 50% of the amount of debenture
    issue before starting the redemption of debenture. 4. Withdrawal from
    Debenture Redemption Reserve is permissible only after 10% of the
    debenture liability has already been reduced by the company. SEBI
    guidelines would not apply under the following situations: (a)
    Infrastructure company (a company wholly engaged in the business of
    developing, maintaining and operating infrastructure facilities); and (b) A
    company issuing debentures with a maturity period of not more than 18
    months.

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