Bonus shares are a source of earnings for shareholders and for company it is returning profit to shareholders. It is generally seen that bonus shares are of equity only. But question arises is can preference shares be issued as bonus shares to equity shareholders?
Legal background
Section 63. (1) Of Companies act, 2013 states as follow, "A company may issue fully paid-up bonus shares to its members, in any manner…"
Word shares are defined under section 2(84) of Companies act 2013. It states as follows, "Share means a share in the share capital of the company and includes a stock".
So, it can be seen that as definition of shares extends to all types of shares in the share capital of the company. Hence under section 63 a company can issue preference shares as bonus shares.
Precedent
Recently in March 2024 board of directors of TVS Motor Company Ltd, listed entity on BSE and NSE have approved bonus issue of preference shares to the equity shareholders of company. TVS Motor Company has proposed to issue redeemable preference shares to equity shareholders through a scheme of arrangement.
Pursuant to this scheme the preference shares would be allotted to equity shareholders and will be redeemed 12 months from date of allotment.
Prior to this in 2002 Sun Pharmaceuticals Ltd had made a bonus issue of preference shares.
Conclusion
Preference shares as bonus issue is a unique way of rewarding shareholders. This does not effectively increase equity base but at the same time rewards shareholders.
CAclubindia
