N. Kumar, J.@mdashThe Petitioner has preferred this Petition under Sections 391 to 393 of the Companies Act, 1956, seeking the sanction for scheme of arrangement, annexure D. The Petitioner-company was incorporated as Astra IDL Ltd. on 11 July 1979 under the provisions of the Companies Act, 1956, in the State of Karnataka. Subsequently, with effect from 31 May 2001, the name was changed to Astra Zeneca Pharma India Ltd. and the registered office of the Petitioner is situated at ''Avishkar'', off Bellary Road, Hebbal, Bangalore-24. The authorised share capital of the Petitioner is Rs. 5 crcres divided into Rs. 2,50,00,000 equity shares of Rs. 2. The issued, subscribed and paid-up share capital is Rs. 5 crores. The main object of the Petitioner-company was to manufacture, produce, formulate, prepare, buy, market, distribute, exchange, supply, self or otherwise and generally to deal in pharmaceutical and other kinds of chemicals and their intermediaries which is set out in the memorandum of association. The Petitioner has produced latest audited balance-sheet for the year ending up to 30 June 2006, showing its assets and liabilities, a copy of which is produced at annexure B to the Petition. The board of directors of the Petitioner have approved and adopted the scheme by which the company intended entering into an arrangement with the shareholders for issue of fully paid non-redeemable debentures from general reserve in a meeting held on 8 September 2006. The relevant board resolution is produced as annexure C. In paragraph 7 the salient features of the said scheme are clearly set out.
2. The Petitioner filed CA No. 1277 of 2006 before this Court for suitable directions regarding holding of meeting of equity shareholders and unsecured creditors, of the company to consider the aforesaid scheme. By an order dated 13 October 2006, the Petitioner was directed to convene the meetings of its equity shareholders and unsecured creditors for the purpose of considering and approving with or without modification of the said scheme. In terms of the aforesaid order Mr. Darious Erach Udwadia, chairman of the Petitioner-company held a meeting after issuing individual notices and also issuing a notice by way of paper publication on 13 November 2006 at Vijaynagar Hall, Taj Residency Hotel, No. 41/3, M.G. Road, Bangalore. He has also filed a report. A perusal of the aforesaid report shows, out of 111 equity shareholders who attended the meeting in person or by proxy, 86 equity shareholders exercised their votes in person or by proxy, 83 equity shareholders who held shares worth Rs. 2,25,69,638 equity shares of Rs. 2 each fully paid-up voted for the scheme. No equity shareholder voted against the said scheme. Three equity shareholders representing in the aggregate 50 equity shares of Rs. 2 each fully paid were regarded as invalid. Thus, the meeting of the shareholders approved the scheme unanimously. 38 unsecured creditors attending the meeting in person or by proxy exercised their votes in person or by proxy. The total amount due to the said unsecured creditors is Rs. 20,58,10,115. They also voted for the scheme. No unsecured creditor voted against the scheme. There were no invalid ballots. Thereafter, the present Petition is filed for according sanction to the scheme. This Court on 2 January 2007, issued notice to the Regional Director, Chennai, and the Petitioner was permitted to take out paper publication in one English edition of ''The Hindu'' and one Kannada edition of ''Prajavani'' fixing the date of hearing as 1 February 2007. Accordingly, notice is served on the Regional Director, Chennai, and paper publication is also taken. In pursuance of notice served, the Regional Director has entered appearance and has filed his statement of objections. No shareholder or creditor has appeared to oppose the Petition. The Regional Director opposing the application has stated that the Petitioner-company is treating the bonus debentures as dividend and is also remitting the dividend distribution tax amounting to Rs. 8,76,56,250 to the revenue authorities. Hence the provisions of Section 205A(3) of the Companies Act, 1956, and the rules made thereunder are generally applicable on the analogy that the company is declaring dividend out of its reserves. The amount proposed to be utilized by the company exceeds the amount prescribed under the aforesaid rules. Further, it is stated that the bonus debentures issued out of reserves of the company is against the provisions of Section 77 of the Companies Act, 1956, as subscription to securities issued by the company are funded from the company''s sources. Lastly, it was contended that, u/s 117C(1) of the Act, where a company issues debentures, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of the profits every year until such debentures are redeemed. Further, Sub-section (2) of Section 117C provides that the amount credited to the debenture redemption reserve shall not be used by the company except for the aforesaid purpose. The company has sought for dispensing with the creation of a debenture redemption reserve which cannot be permitted. Therefore, they have sought for appropriate orders to be passed.
3. I have heard learned Counsel for the parties. Insofar as the objection regarding non-compliance of Section 117C of the Companies Act is concerned, the Petitioner has filed an affidavit on 30 March 2007, giving up the prayer for dispensing the creation of a debenture redemption reserve and they have undertaken to comply with Section 117C of the Companies Act and create a debenture redemption reserve fund for redemption of such debentures and all adequate amounts would be credited to the said account from out of the profits every year, only such debentures are redeemed. In view of the unconditional undertaking given by the Petitioner, the said objection does not survive for consideration.
4. The other objection taken by the Regional Director is that the company is treating the bonus debentures as dividends and also distributing the dividend amounting to Rs. 8,75,56,250 to the revenue authorities and, therefore, of the analogy that the company is declaring the dividends out of the reserves, the provisions of Section 205A(3) of the Act, are attracted and, therefore, the said amount cannot be utilised for issuing bonus debentures. Section 205A applies to unpaid dividend to be transferred to special dividend account and thereafter, a dividend has been declared by the company, but has not been paid or claimed within thirty days from the date of such declaration, then the company shall within seven days from the date of expiry of the said period of thirty days transfer the total amount of dividend which remains unpaid or unclaimed within thirty days to the special account opened by the company in that behalf in a scheduled bank to be called ''unpaid dividend of the company''. In the instant case, the amount which is now sought to be converted into bonus debenture is not an amount which is declared as a dividend and unpaid to the shareholders. Therefore, the said objection has no substance and Section 205A is not attracted to the facts of this case.
5. The last objection raised is that the bonus debentures issued out of free reserves of the company is against the provisions of Section 77 of the Act, as subscription to securities issued by the company are funded from the company sources. Section 77 of the Act prescribes restrictions on purchase by company, or loans by company for purchase of its own or its holding company''s shares. Section 77A deals with the power of the company to purchase its own securities:
Therefore, per se the aforesaid sections have no application. But, the grievance of the Regional Director appears to be that the bonus debentures that are issued out of the reserves of the company are not permitted in law. Therefore, the question for consideration is, is there any prohibition under the Act for issue of any bonus debentures out of the free reserves to their shareholders.
6. Section 2(12) of the Act defines what a debenture is Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not Section 82 of the Act provides for nature of shares and debentures. In the entire scheme of the Act there is no reference to a bonus debenture. In the Company Law by Robert Rule Pennington, eighth edition, dealing with the capitalizations, bonus issues and dividends in specie, the learned author has stated as under:
If a company has power by its articles simply to pay dividends, or if its articles are silent on the manner in which dividends shall be paid, the company may distribute dividends only in the form of cash. It cannot declare a dividend of so much per share and resolve that the dividend shall be satisfied by the allotment of further shares or debentures of a corresponding nominal value credited as fully or partly paid. It is common, however, for articles to contain a power for the company by passing-an ordinary resolution in general meeting on the recommendation of its directors (a) to set free for distribution any part of its distributable profits or reserves and to apply them in paying up in whole or part the issue price of partly paid shares held by members, or in paying in full the nominal value of new shares, debentures or debt securities to be issued to members in the same manner and proportions as a cash dividend of the same amount would have been distributed; and (b) to capitalise any part of the amounts standing to the credit of the company''s profit and loss account or to the company''s revenue reserves or to unrealised profits and to apply the amount so capitalised in paying in full the nominal value of new shares to be issued to members in the same manner and proportions as a cash dividend of the same amount would have been distributed. New shares, debentures or debt securities issued in this way on a capitalisation of profits or reserves are known as bonus shares or debentures, but the name is misleading in that it implies, that they are a gift from the company. If they were issued gratuitously, they would not be paid up at all, and in the case of bonus shares, the company could call on their holders to pay for them in cash. In fact bonus shares or debentures are not issued gratuitously, because their nominal value is paid in full or in part by the capitalised profits or reserves of the company which could otherwise have been distributed to the shareholders as a cash dividend or in the case of unrealised profits, retained as reserve.
An article authorising a capitalisation or bonus issue usually provides that the bonus shares, debentures or debt securities shall be. issued to the shareholders in the same proportions as the capitalised profits or reserves could have been distributed as dividends of the same amount paid in cash. This often results in shareholders being entitled to fractions of bonus shares or debentures, but of course, fractions of shares or debentures cannot be issued.
7. The Supreme Court in the case of
A bonus issue of debentures or redeemable preference shares ranks as a distribution, and so also will payments of interest or dividends. An issue of irredeemable bonus shares, however, unless related to a previous repayment, does not rank as a distribution. It should be appreciated that distributions are chargeable to income tax Schedule F, and in the hands of the shareholders, the distributions are liable to surtax. This includes capital dividends.
8. In the case of Shashibala Navnitlal v. Commissioner of income tax (1964) 54 ITR 478 (Guj), a Division Bench of the Gujarat High Court held as under:
These bonus shares may be either ordinary or preference shares on the one hand or redeemable preference shares on the other. The company may also instead of issuing bonus shares issue bonus debentures by capitalising its accumulated profits. In all these cases the accumulated profits which are capitalised remain in the coffers of the company and no part of them actually goes into the pockets of the shareholders the only change that takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividend are impounded to increase the capital of the company and what the shareholders get is not any payment out of the accumulated profits but bonus shares or bonus debentures credited as fully paid up. The transaction, to use the words of Viscount Cave in Commissioners of Inland Revenue v. John Blott (1921) 8 TC 101, takes ''nothing out of the company''s coffers and'' puts ''nothing into the shareholders'' pockets'' but what happens is that the accumulated profits which are capitalised are applied in paying up the amounts due on bonus shares or debentures to be issued to the shareholders as fully paid up bonus shares or debentures. This analysis of the mechanism of issue of bonus shares or debentures is, apart from the abundance of authority to support it, clearly based on sound principle.
9. From the aforesaid statutory provisions and the legal position the law on the subject could be summarised as hereunder:
10. When a company prospers and earns profits it may do one of two things with the profits. It may either distribute the profits by way of dividend among the shareholders or accumulate them. Ordinarily, these undistributed profits are employed in the business either in acquisition of fixed assets or as working capital and really represent an increase in the capital employed in the business. When these increase to a considerable extent, the issued capital of the company ceases to bear a true relation to the real capital employed in the business. The company may, in such a case, decide to bring its issued capital into a true relationship with the capital actually employed in the business and may for that purpose capitalise its accumulated profits and issue fully paid-up shares or debentures, of a nominal value equal to the amount capitalised to its shareholders. These new shares or debentures are called as bonus shares or bonus debentures. They are not a gift from the company. They are not issued gratuitously. Their nominal value is paid in full by the capitalized profits or reserves of the company, which could otherwise have been distributed to the shareholders.
11. The company may instead of issuing bonus shares, issue bonus debentures by capitalising its accumulated profits. The accumulated profits which are capitalised remain in the coffers of the company and no part of them actually goes into the pockets of the shareholders the only change that takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividend are impounded to increase the capital of the company and what the shareholders get is not any payment out of the accumulated profits but bonus shares or bonus debentures credited as fully paid-up. When such bonus shares or bonus debentures are issued, admittedly, no moneys are paid by the shareholders for the bonus shares or bonus debentures issued to them. There is no payment of the accumulated profits to the shareholders since no part of the accumulated profits is liberated to them. The company does not part with any of the accumulated profits nor do the shareholders receive any part of them. But the accumulated profits are applied in paying up the capital sums which the shareholders would otherwise have had to contribute for the purchase of new shares or new debentures.
12. Clause 172 of the articles of association of the company provides for capitalisation. By a special resolution in general meeting the company may resolve that any moneys, investments or other assets forming part of the undivided profits of the company standing to the credit of the reserve fund, or any capital redemption reserve account, or in the hands of the company and available for dividend be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportions on the footing that they become entitled thereto as capital and that all or any part of such capitalized fund be applied on behalf of such shareholders in paying up in full either at par or at such premium as the resolution may provide, any un-issued shares or debentures or debentures-stock holders in full satisfaction of their interest in the said capitalized sum. It is in pursuance of this specific article in the articles of association, the board of directors of the company have approved and adopted the scheme of arrangement with its shareholders for the issue of secured fully paid redeemable non-convertible bonus debentures from general reserve. In the meeting held in pursuance of the permission granted by this Court, all the shareholders and the creditors of the company to consider and approve the aforesaid scheme of arrangement, unanimously the scheme is approved. The company since 2000 is a zero debt company. It has no borrowings from banks or other financial institutions for working capital or other requirements for carrying on its business efficiently. The company has been by and large following a prudent dividend policy and has consequently transferred a significant part of its retained profits to general reserve. The company also has significant amounts to the credit of its profit and loss account balance. The capital represented in the form of general reserve is in excess of its wants. It has significant cash resources and capital, surplus to its sustainable long-term operational needs. The company has thus come to the conclusion that it should return the general reserve in excess of its wants to its shareholders by restructuring its general reserve. The issue of debentures with a 12 months tenure under the said scheme is designed to achieve this object.
13. The mechanism of issue of bonus shares or debentures is, apart from the abundance of authority to support it, clearly based on sound principle. There is no legal impediment. This is a well accepted practice. However, the scheme is conditional and subject to the requisite sanction or approval from other concerned authorities being obtained and granted in the matter in respect of which sanctions or approvals shall be required. The sanction accorded by this Court to the scheme of arrangement is always subject to such sanctions or approval that is, required from the concerned authorities.
14. As already stated, the said scheme has been approved by both the shareholders and creditors of the company. After due publication of hearing of this Petition, no one has appeared before this Court to oppose the said ''scheme of arrangement''. In that view, I do not find any substance in the last objection raised by the Registrar of Companies.
15. Hence, I pass the following order:
(i) Petition is allowed.
(ii) The ''scheme of arrangement'' proposed by the Petitioner is accorded sanction subject to the compliance u/s 117C of the Companies Act, as wall as sanction or approval from the concerned authorities, if required under law.
(iii) The Petitioner to serve copy of the order within 30 days from the date of receipt of the certified copy on the Registrar of Companies.
(iv) Registry is directed to draw the decree as per Form No. 42 of the Companies (Court) Rules, 1959.
