Bonus issue Query

[Usha hegde]

Dear Frnds,


Bonus issue can be made out of revaluation Profits?
waiting for your reliable answer as the earliest.



Regards,

Usha Hegde

[Bharat Hegde]

Ms.Usha,

 

Revaluation reserve is not available for capitalisation as it is only a book adjustment.

 

With Regards,

Bharat

 

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[Usha hegde]

Mr. Bharat

Thanks a lot for your reply.

[Vivek Hegde]

Here is the extract....

Provisions contained in the Companies Act, 1956

The Companies Act, 1956 does not contain a separate set of sections dealing with bonus shares. The Act though has made references to bonus issue/shares in its certain sections.Reference may be made to section 205 of the Companies Act, 1956, which provides that dividend could only be paid out of profits. The proviso to subsection (3) of section 205 permits capitalisation of profits or reserve of a

company 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. Clearly, the Companies Act specifically permits utilisation of reserve arising out of revaluation of assets for purpose of issuing fully paid up bonus shares.

Hope it clarifies.

Vivek

On Tue, Aug 17, 2010 at 2:56 PM, Vivek Hegde <vivekhe...@gmail.com> wrote:

Dear Usha

It is permitted.Attaching an article on the same. You will get clarity.

Vivek

On Tue, Aug 17, 2010 at 2:53 PM, Bharat Hegde <bharath...@gmail.com> wrote:

--
Warm Regards

CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223

--
Warm Regards

CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223

[Vivek Hegde]

Dear Usha

It is permitted.Attaching an article on the same. You will get clarity.

Vivek

On Tue, Aug 17, 2010 at 2:53 PM, Bharat Hegde <bharath...@gmail.com> wrote:

[Usha hegde]

Dear Vivek,

ya sure now its clarified. thanks a lot.........

[Alok Rudra]

Dear All,

I am agreed with the reasoning of Mr. Vivek Hegde with certain modification --

It is true that the Act does not contain a separate set of section dealings with bonus shares. Section 205 has certain inference on Bonus issue. One should read the words"available for dividends"--- for bonus issue as "available for dividends/bonus". Court has already taken such an interpretation in many cases. Analysis done by Mr. Vivek is 100% correct.

But one should also not forget this area is very critical and vulnerable--

1. Capitalization of profits is a process where accumulated profits and reserves are converted into capital.

2. The issue of bonus shares is permitted only out of free reserves (being built up from genuine profits of the entity) or from Share premium account (collected in cash only). It is worth to note here Capital Reserves created on revaluation of assets or without cash accrual should be ignored for the purposes of bonus issues.

Regards,

---------------

Alok  

[Bharat Hegde]

Dear Vivek,

 

I am not convinced with your answer. The article attached is also looks bit old. If you have any other articles or case laws pls share with me.

 

As per the Regulation 94(1) of SEBI (IC&DR) Regulation says:

 

94(1) The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium collected in cash only and reserve created by revaluation of fixed assets shall not be capitalised for the purpose of issuing bonus shares.

 

In 'Mamatha Bhargav's  'Company Law Procedures' also, it is clearly given that revaluation reserve is not available.

 

Views of the other members are solicited

[Alok Rudra]

Dear Mr. Bharat,

Kindly do not rule out Mr. Vivek's analysis. Before hitting back with such a remark, kindly do the homework. He is not wrong in his analysis. The reasoning he has forwarded is 100% correct except some technical issues. 

Regards,

---------------

Alok

[Vivek Hegde]

Dear Bharat/Other Members

When it comes to so called "Best Practices" i fully agree with you. But as on date we are not wrong (may not be right) in taking that stand.

Here is a Extract of the News item :

New Delhi , July 1 2006

The Institute of Chartered Accountants of India (ICAI) has decided to suggest to the Government that the company law be amended to explicitly specify that private companies cannot issue bonus shares through capitalisation of revaluation reserves.

You can follow the link.........http://www.thehindubusinessline.com/2006/07/02/stories/2006070202880200.htm

That means ICAI is convinced that as on July 1, 2006 the Company Law permits issues of bonus shares(as it is suggesting the amendment in company law) out of revaluation reserves. I do not remember any amendment thereafter.

Attaching a Judgement which is contrary to my view. When the interpretation of law is an issue i am not surprised with this judgement.

Vivek Hegde

[Bharat Hegde]

Dear Mr. Alok and Vivek,

 

I am very very sorry, if my wordings are not correct.

 

Kindly note that, I have not ruled out Mr.Vivek's opinion. I just said that 'I am not convinced'.

 

Being CS student I always respect others and others' opinions.

[Alok Rudra]

Dear Vivek,

As you can notice from my words, I have not ruled out your statement, I am well aware of recent decision and discussion on the issue in 2005 decided case in Bhagwati Devlopers.

Leave SEBI guidelines for a moment --  out of the issue, the moot point is --

The Term "Reserve" is not defined in the Act. But Schedule VI has definition in negative form which excludes - amount written off/retained by way of providing depreciation or diminution in value of assets; or retention of an amount for providing any known liability. 

Further the reserve may be either general or specific. or Revenue or capital. As we all know capital reserve is not available for dividend distribution. A capital reserve forms part of shareholder's fund but not available for distribution of dividend. Once is it not available for dividend by what interpretation one can hold its available for bonus when we take recourse of Section 205.

Only possible way i can foresee is u/s 391 to 394 when you have comprehensive scheme approved by the High Court and your scheme also includes for instance - writing off your revenue losses against capital profit or issue of bonus shares out of capital profit.

Regards,

---------------

Alok