Issue of bonus share in case pf preference share

This query is : Resolved

Deepakoza (Querist)
Follow

29 April 2008 can we utilise share premium account for issuing of bonus share, currently if company do not have equity share premium but have issued convertible preference at a premium (fully paid)
whether pref.shares need to be coverted into equity share before issue of bonus share?
Are there any guidelines for issue of bonus share by pvt.co.?

R.V.RAO

R.V.RAO (Expert)
Follow

05 May 2008 MS.RADHIKA C.S ON 19/04/08 HAS PROVIEDED IN CA CLUB FORUM THE FOLLOWING PROCEDURE FOR ISSUE OF BONUS SHARES.THE SAME IS REPRODUCED FOR OUR MEMBERS USE.
COURTESY:MS.RADHIKA-C.S

VERIFY WHETHER THE COMPANY IS ELIGIBLE TO ISSUE BONUS SHARES
VERIFY WHETHER THERE IS ADEQUATE UN-ISSUED EQUITY CAPITAL IN THE AUTHORIZED CAPITAL

DETERMINE THE TERMS AND CONDITIONS OF BONUS ISSUE

CONVENE BOARD MEETING - PASS BOARD RESOLUTION

GIVE NOTICE OF EXTRAORDINARY GENERAL MEETING

PASS ORDINARY RESOLUTION IN THE EXTRAORDINARY GENERAL MEETING

CONVENE BOARD MEETING --MAKE ALLOTMENT OF SHARES

FILE RETURN OF ALLOTMENT

ALL SHARE CERTIFICATES SHALL BE DELIVERED TO THE SHAREHOLDERS WITHIN 3 MONTHS FROM THE DATE OF ALLOTMENT OF BONUS SHARES.

VERIFY WHETHER THE COMPANY IS ELIGIBLE TO ISSUE BONUS SHARES

Issue of bonus share is a common feature and it takes place when the company accumulates a large surplus. This surplus is converted into capital and divided among members in proportion to their rights as fully paid bonus shares. Bonus issue is also known as capitalisation issue as the purpose behind this is to capitalise profits which are available in the hands of the company after the distribution of profits as dividends to its shareholders.

The Companies Act, 1956 does not contain any provisions dealing with bonus shares, though it has made references to bonus issue in certain sections. Section 205(3) of the Companies Act, 1956 there is no prohibition on a company to capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares or paying up any amount, for the time being unpaid, on any shares held by the members of the company.

Check whether the Articles of Association of the company contains any restriction on capitalisation of profits or reserves for issuing fully paid up bonus shares.

Regulations 96 & 97 of Table A to Schedule I of the Companies Acty, 1956 contain provisions relating to capitalisation of profits and reserves of the company. According to these regulations only the share premium account and the capital redemption reserve account shall be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares. Also the proposal to issue bonus shares has to be approved by the shareholders of the company in general meeting upon recommendation by the Board of Directors of the company However if these regulations have been excluded from the Articles of Association of the company then it shall be sufficient if the Board approves the bonus issue.

SO AS PER YOUR ARTICLE IF SHAREHOLDER RESOLUTION IS NEEDED,THEN YOU NEED TO PASS THE SAME AND FILE FORM 23 .
FOLLOW THE ABOVE PROCEDURE.

SEC 205(3) DOES NOT DIFFERENTIATE BETWEEN PUBLIC OR PVT.LTD.CO.
BUT THE REQUIREMENT WHICH UNIFORMLY APPLIES TO EVERY CO. IS THAT FREE RESERVES BUILT OUT OF GENUINE PROFITS CAN BE USED FOR ISSUE OF FULLY PAID BIONUS SHARES.
BUT THERE SHOULD NOT BE DEFAULT RELATING TO
1. PAYMENT OF INT./PRINCIPAL OF PUBLIC DEPOSITS.OR
2. PAYMENT OF PRINCIPAL /INT . ON DEBENTURES OR
3. PAYMENT OF STATUTORY DUES OF EMPLOYEES.

WITHIN 6 MONTHS OF PASSING BOARD RESOLUTION,BONUS SHARES SHALL BE ISUED.

SEBI GUIDELINES (DISCLOSURE AND INVESTOR PROTECTION )GUIDELINES 2000CONTANIS GUIDELINES ON ISSUE OF BONUS SHARES.

IN YOUR CASE, SHARE PREMIUM A/C OF THE COMPANY IS ONE AND SAME (THERE IS NO SEPARATE PREF. SHARE PREMIUM AND EQUITY SHARE PREMIUM A/C. ) .THE ACT TALKS ABOUT SHARE PREMIUM ONLY. HENCE THERE IS NO BAR IF A COMPANY USES PREF. SAHRE PREMIUM FOR ISSUING BONUS SHARES TO EQUITY SHARE HOLDERS.
BUT HOW DO YOU MEET PREF. SHARES REDEMPTION PREMIUM TOMORROW WHEN YOU REDEEM PREF. SHARES?
FOR THAT, AGAIN YOU NEED TO CREATE SHARE PREMIUM BY APPROPRIATING FROM OUT OF PROFIT. AS LONG AS YOU ARE ABLE TO MEET THAT OBLIGATION ALSO SUCCESSFULLY, THERE IS NO ISSUE ON THAT.
FOR THE PRESENT ,YOU CAN USE PREF. SHARE PREMIUM FOR EQUITY BONUS SHARES.
NO NEED TO CONVERT PREF.SHARES TO EQUITY ,JUST IN CASE YOU ARE DOING IT FOR BONUS TO EQ. HOLDERS.
R.V.RAO