Last week, Reserve Bank of India (RBI) clarified its stand on pricing of options and on the issue of bonus preference shares and debentures by Indian companies, especially those having non-resident shareholders.
It is normal that companies issue bonus equity shares all the time to existing equity shareholders out of their free reserves. However, in the past, Indian companies have also capitalised their reserves and surplus to issue either redeemable preference shares or debentures to optimally structure their capital.
In 2007, RBI amended the regulations whereby optionally convertible or redeemable instrument issued to non-resident investors were treated at par with external commercial borrowings. That move has limited options available to the Indian companies to raise funds from non-resident shareholders through optionally convertible instruments. The circular to the effect continues to remain in force as the new circular only allows issue of bonus shares out of existing reserves without raising funds.
So, what is the reason for issuing a clarification on the issue of bonus redeemable preference shares or non-convertible debentures? According to RBI, the central bank was receiving a reference from some Indian companies regarding the issue of these instrument to shareholders, including non-resident ones, through a high court-approved Scheme of Arrangement under Section 391 of the Companies Act, 1956. RBI was granting permission on a case-to-case basis and therefore, in order to rationalise and simplify the process, it felt that an amendment in the regulations can create enabling policy for issuing these instruments.
The circular suggests that this general permission route is available only when these instruments are issued through a Scheme of Arrangement approved by the jurisdictional High Court. Therefore, companies which intend to issue bonus preference shares or debentures pursuant to board resolutions/shareholders' approval would still need to approach RBI (if non-residents are shareholders) to seek approval on a case-to-case basis.
RBI has clarified that issue of such instruments would also be subject to 'no objection' from the income tax authorities. This requirement may prove to be hurdle due to lack of specific enabling provisions under the tax laws. One needs to see how under the existing framework of law, the tax authorities can provide 'no objection' certification to the issuing of such instruments. One may argue that there was no need to mandate such 'no objection' from the tax authorities as currently no such approval is required where companies intend to reward their shareholders in other forms, like