Issuing Bonus Debentures: A Need to Clarify the Cloudy Regime

The issue of bonus debentures (“BD”), though not a recent phenomenon, has garnered its fair share of debates. Companies usually opt to divide their profit by issuing dividends or bonus shares. However, a few companies have divided their profit by issuing BDs. BD is that form of an issue that has innate characteristics of a bonus share and debentures in addition to certain other characters that is unique to itself. The uniqueness of such issue is the benefit that the companies tend to accrue through the it – such as increasing the present liquidity and reducing the cash outflow. Though on the face of it, it seems beneficial, many companies have not opted for such an issue due to the absence of specific provisions in the Companies Act, 2013 (“2013 Act”) that facilitate the issue.

Though the BDs, as discussed earlier have characteristics of debentures and bonus shares, the provisions specifically relating to issue of debentures or bonus shares, under Sections 71 and 63 of the 2013 Act respectively, cannot be invoked since they does not cater to the issue of BDs. In the absence of a specific provision, companies have issued BDs by calling a meeting of its shareholders under a scheme of arrangement or amalgamation under Section 230 or Section 232 of the 2013 Act, respectively. While a scheme of arrangement is a method adopted by companies to enter into an arrangement between the company and its shareholder or creditors; amalgamations through a scheme of arrangement is adopted for reconstructing the company through mergers or amalgamations.

Companies such as Hindustan Unilever Ltd. in 2001, Britannia Industries Ltd. in 2009, Dr. Reddy’s Laboratory in 2010, Coromandel International Ltd. in 2014, Blue Dart Express Ltd. in 2014, National Thermal Power Corporation in 2015 and Britannia Industries Ltd.  again in 2021 have issued such BDs. While Hindustan Unilever Ltd. issued BDs in accordance with Section 391 of the Companies Act, 1956 (“1956 Act”), which corresponds to Section 230 of the 2013 Act; other companies (as listed above) have issued BDs in accordance with Sections 391 to 394 of the 1956 Act which  correspond to Sections 230 to 232 under the 2013 Act. Britannia Industries Ltd. as well, being the company to have issued BDs the latest, have opted to issue the same pursuant to Sections 230 to 232 of the 2013 Act, though Section 232 is narrow in its application. This brings forth a considerable disagreement and a looming question as to the appropriate procedure that must be followed for its issue.

Hence, this blog analyses and clarifies the procedure that must be followed by the companies in the future to issue BDs by examining the provisions of the 1956 Act, 2013 Act, Companies (Share Capital and Debentures) Rules, 2014Companies (Compromises, Arrangement and Amalgamation) Rules, 2016 and the relevant RBI notification.

Whether the Procedure under Section 232 is Applicable?

Section 232(1) of the 2013 Act provides that an application has to be made to the National Company Law Tribunal (“NCLT”) where a scheme of arrangement or compromise involves the “merger or amalgamation of two or more companies and pursuant to the scheme, either whole or part of the undertaking is to be transferred to another company or to be divided and transferred to two or more companies”. A prima facie view of this provision suggests that there must be a merger or an amalgamation through a scheme of arrangement or compromise, for the company to proceed under this provision of the 2013 Act.

Additionally, a perusal of the provisions of the erstwhile 1956 Act has to be made, in order to ascertain and demonstrate the variation between the 1946 Act to the present 2013 Act. Section 394 of the 1956 Act, which corresponds to Section 232 of the 2013 Act,  provides that the scheme of arrangement or compromise must be proposed in connection with a “scheme of reconstruction” of a company or the amalgamation between two or more companies. The issuance of BDs amounts to an internal reconstruction of the company since there is a change in the asset-liability ratio by virtue of the increased liability. Therefore, the companies under the old regime have proceeded under the same, since the provision allows for a reconstruction of the company.  However, with the enactment of the 2013 Act, the scope of the corresponding provision under Section 232 has been reduced and is now limited to those transactions where there is a merger or amalgamation between companies. Hence, approaching the NCLT under the aforesaid provision would be incorrect and a need arises to assess if approaching the NCLT under Section 230 of the 2013 Act would be sufficient to issue BDs.

Whether the Procedure under Section 230 Suffices to Issue Bonus Debentures?

Interestingly, under the 1956 Act, the provision that corresponds to Section 230 of the 2013 Act is Section 391, which does not define an ‘arrangement’. Hence, a reading of both Section 391 and Section 394 of the 1956 Act suggests that since the former provision was narrow and the latter was broad, the companies under the old regime adopted the said route under section 391 and 394 of the 1956 Act. However, under Section 230 of the 2013 Act, it provides for an application to be made to the NCLT for a compromise or arrangement proposed between the company and its creditors or its members. The term ‘arrangement’ has not exhaustively been defined, and rather is an inclusive definition as per the explanation to section 232(1).

Assessing the import of the term ‘arrangement’, the Gujarat High Court in the case of In Re Indian Petrochemicals stated that the term has not been statutorily defined, but is an extremely broad term. Additionally, the Supreme Court in 63 Moon Technologies Ltd. and Ors. v. Union of India and Ors stated that it involves any transaction within a company that would necessarily comply with the provisions of Section 230 of the 2013 Act.  Further, the authors have opined that the term ‘arrangement’ covers a broad range of transactions which include within its ambit re-organisation of the assets. As stated earlier, since the issue of a BD would amount to an internal re-organisation of the company, it can be adequately dealt with under Section 230 of the 2013 Act. Hence, this clarifies that companies can proceed under Section 230 of the 2013 Act to issue BDs.

Whether the relevant rules and notifications create a barrier from solely invoking the provisions of Section 230?

Having assessed the provisions of the 2013 Act, and understanding that Section 230 is broad enough to allow for issuance of BDs, a perusal of the relevant rules and notifications must be made, to ensure that no specific barrier is created in its enforcement.

The Companies (Compromises, Arrangement and Amalgamation) Rules, 2016, under Rule 18 states that a petition must be made under Section 232 of the 2013 Act “where the compromise or arrangement has been proposed of or in connection with a ‘scheme for reconstruction’ of any company or companies or amalgamation of any two or more companies”. Though this Rule prima facie creates a contradiction with the current provision under Section 232 of the 2013 Act, the Rules further provide for another mandatory condition – that the matter under Section 232 of the 2013 Act should not be capable of being one that can be dealt with adequately in a petition for sanctioning of the compromise or arrangement under Section 230 of the 2013 Act. This mandatory provision harmonises the blatant contradiction that would otherwise exist. As established earlier, since the issuing of BDs would be covered under Section 230 of the 2013 Act, this Rule does not create a barrier in proceeding under this section.

The Companies (Share Capital and Debentures) Rules, 2014 provide for the requirements to be followed for issue of a debenture under Section 71 of the 2013 Act. Since the said Rules only specifically deal with regular debentures and not BDs, and do not hamper its enforcement under Section 230, there is no requirement to assess these Rules.

The RBI, vide notification dated January 6, 2014, stated that an Indian company can issue “debentures to non-resident shareholders, including the depositories that act as trustees, by way of distribution as bonus from its general reserves under a scheme of arrangement approved by a court under the provisions of the Companies Act, subject to a non-objection from the Income Tax Authority”. Hence, by virtue of this notification, there is an automatic approval by the RBI, though an additional no-object from the Income Tax Authority is required. Hence, the said provision merely clarifies the additional approval required and does not mandate that the companies must proceed under Section 232 of the 2013 Act. The notification rather states that a ‘scheme of arrangement’ approved by a court, in the present case, the NCLT would suffice to issue such BDs even to non-resident shareholders. Hence, Section 230 of the 2013 Act would suffice in this case.


The analysis of the provisions, rules and notification provide the clarity that Section 230 of the 2013 Act is wide enough to encompass within its ambit the issue of BDs. Hence, it would suffice if companies follow this route to issue BDs in the future. Approaching the NCLT under Section 232 of the 2013 Act would be faulty as the scope of the section would not permit for the same. Keeping in mind the benefit that companies derive from issuing BDs, it would be beneficial towards their cause, if the Ministry of Corporate Affairs either releases a clarification regarding the issue of these BDs under Section 230 of the 2013 Act or if an amendment is carried out to the effect of providing a provision within the Act for the issuing of BDs.

This article has been written by Akash Thomas Jose, student at School of Law, Christ University, Bangalore.

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