sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
« News Headlines »
 5 things you should not forget while filing income tax return
 10 Easy Steps to File ITR 1 Online
 How to e-verify income tax return?
 What to do when you receive a notice from the tax department
 How to use your Form 16
 Which ITR form applies to you for financial year 2017-18?
 Income tax returns filing form-2 released; should you use it? Find out
  Are you planning to file ITR 1 form? here's how to do it Income Tax Return (ITR) filing
 30 LPA-Opening Financial Controller
 ITR form 2 in java release by CBDT for return filing by individuals
 How to file your income tax return using ITR Form-1 Income Tax efiling for AY 2018-19

Bonus dimensions
February, 28th 2008

Reliance Power does not make any bones about the fact that it hasnt produced a megawatt of electricity, the main object of its business. Yet it has announced a bonus issue of three shares for every five held by non-promoters.

To be sure, the company is perfectly on a strong legal wicket because the Companies Act maintains a studied silence on the issue of reward to equity shareholders except that it permits bonus issue whereas the norm is cash dividend. It also speaks of dividend only after providing for depreciation. The provisions relating to securities premium do permit capitalisation of such premium and, hence, bonus shares can be issued out of share premium.

The act of self-abnegation on the part of the Reliance Power promoters in declining the bonus entitlement may also pass legal muster given the fact that the law has implicitly left the question of reward to shareholders to be decided largely by the Articles of the company. Despite being on the right side of the law, the issue does raise some pertinent questions that must be pondered and not brushed under the carpet.

Safety net mechanism

The post-haste announcement of bonus hot on the heels of the cold reception given to Reliance Power by the secondary market is a tacit admission of premium overkill in the IPO. To put things in perspective, let us take a look at the numbers. Post bonus, for a retail investor who was charged Rs 430 per share with a face value of Rs 10, the average cost would be Rs 268.75 per share given the fact that cost of five shares Rs 2,150 now gets spread to eight shares. But then this extraordinary gesture to the shareholders leaves the promoters with minor bruises. It is no big deal to give back what evidently belongs to the shareholders.

The company would have covered itself with glory had it volunteered to adopt the voluntary safety net mechanism pursuant to which any retail investor can sell up to a maximum of one thousand shares to the promoters in case the market price during the six months following the IPO dips below the offer price.

That it has not and instead opted for the easier course is a cause for concern given the possibility of encore by other companies with vaulting ambitions in going for overkill in the matter of premium in IPOs.

Bonus sans profit

Furthermore, bonus is a statement of financial strength built on the back of good performance. It is ploughing back of profits by a company with growth potential.

It is also resorted to by companies that are cash-strapped despite enjoying good profits. And it becomes almost inevitable when a company builds reserves that are many times more than the share capital which is the case with our oil majors, thus lending legitimacy to the recent muted demand of the government, the largest shareholders in these companies, for bonus shares.

The short point is bonus is a reward given by companies that have performed well as evidenced by the burgeoning reserves. Reliance Power perhaps has set a record of sorts by proposing to issue bonus sans a single rupee of operational profits. Having said this one must hasten to add that the law is on the side of the company.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)
Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Internet Marketing Website Marketing Internet Promotion Internet Marketing India Website Marketing India Internet Promotion India Internet Marketing Consultancy Website Marketing Consulta

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions