‘Bonus Shares’ issue - a baseless controversy !

Nihal Sri Ameresekere (F.C.A. F.C.M.A.)
Former Chairman,
Public Enterprise Reform Commission

A baseless and unfounded ‘controversy’ was created on the matter of issue of ‘bonus shares’, leading it to be quite an ‘issue’ in the media, who cannot be faulted for reporting, what some persons had ‘propounded’, that no ‘bonus shares’ could be issued !

There is a concept and scheme laid down in the Companies Act No. 7 of 2007 for the management of funds of a company, and it would be clear to anyone, who understands such concept and scheme, that ‘bonus shares’ could be issued.

In fact, the Companies Act No. 7 of 2007 permitted the issue of ‘bonus shares’ by introducing the concept of ‘distributions’, which would be out of ‘reserves’.

Companies Act No. 7 of 2007, in fact, has specifically stipulated as Section 72 (3) (b) that - “ an allotment of fully paid shares in the company may be validly made by way of capitalisation of reserves of the company”.

Thus the Board may issue fully paid shares of the Company by way of a ‘bonus issue’ by capitilising available reserves and/or profits of the Company.

Section 52 stipulates that the ‘consideration’ for issue of Shares, in the opinion of the Board, should be ‘fair and reasonable’ to the Company and to all its existing Shareholders.

The Board shall decide, in their opinion, the value per share of such bonus issue, by taking into reckoning the amount of reserves, which are to be capitalised for the issue of such fully paid shares, as and by way of a distribution.

Such value per share need not be the market value of such shares, or any other valuation of such shares, provided however, the company satisfies the solvency test, after the issue of such bonus shares.

Therefore, the quantum of profits / reserves to be ‘capitalised’ i.e. to be added on to Stated Capital, divided by the number of ‘bonus shares’ to be issued equitably on a pro-rata basis to all the existing Shareholders would be the ‘consideration’ in conformity with Section 52, since it would be fair and reasonable to the Company and to all existing Shareholders, in the absence of the regime of the ‘nominal value’ of a Share, which has been done away with; subject however, to not eroding the ‘Solvency Test’ of the Company.

Such feature was not provided for in the repealed Companies Act No. 17 of 1982, which provided for the issue of ‘bonus shares’, only from the ‘share premium account’ and the ‘capital redemption reserve fund’.

Therefore no other reserve, could have been utilised, to issue ‘bonus shares’, whereas in contravention of the repealed Companies Act No. 17 of 1982, ‘bonus shares’ were issued, even utilising other ‘reserves’, including ‘revaluation reserves’, which prevailed, curiously without any query or challenge !

Further confusions in regard to ‘distributions’ and the ‘issue’ of ‘bonus shares’ vis-a-vis the definition of ‘distribution’ in Section 529 was also baseless and unfounded, in that, it related to the ‘transfer’ of shares of a company, and not to the ‘issue’ of shares.

In fact, Section 70 stipulates certain restrictions placed prohibiting a company from giving financial assistance to purchase shares of a company. However, in terms of Section 71, such restrictions in Section 70 do not apply in respect of ‘distributions’ and the ‘issue of shares’ by a company.

Section 72 (3) (b) in Section 72 vis-a-vis the prohibition for a subsidiary to acquire shares in a holding company, except to continue to hold shares acquired prior to becoming a subsidiary, but with no right to vote on such shares in the holding company states thus: “72 (3) (b).

Where a body corporate is permitted to continue as a member of the holding company by virtue of paragraph (b) of sub section (1) and paragraph (a) of this subsection, an allotment of fully paid shares in the company may be validly made by way of capitalisation of reserves of the company, which shares also will have no right to vote” No doubt, this would make the issue quite clear to those, who had found it difficult to comprehend the concept and scheme for the issue of ‘bonus shares’, but needed to see it in ‘black and white’!