The Hindu Business Line : Generation of surplus comes first, its usage later

This void was filled in by another law — the Capital Issues Control Act. But it has been given the quietus. One expected the market watchdog SEBI to step in but curiously it has plumped almost for free-pricing regime which is what allowing a c ompany to fix the price band, thereby presenting the participants very little role in the price discovery process.

Section 78 of the Companies Act solemnly says that the amount mobilised from securities premium can be used only for the purposes specified therein.

For good measure it specifically includes the issuance of fully paid bonus shares to the shareholders as an eligible purpose. In retrospect this seems to have been a mistake because this is what emboldened Reliance Power Ltd to pioneer the unique idea of issuance of bonus shares to its shareholders hot on the heels of its IPO.

The thumbs down by the share market on its listinglent credence to the criticism that the issue was overpriced.

Manna from heaven

To be sure, the bonus issue has come as manna from heaven for the non-promoter investors to whom alone it is intended.

Perhaps, the rationale behind allowing share premium to be used for issuance of bonus shares was to give back to the shareholders, albeit in kind, what was collected in advance. But then this goes against the time-honoured spirit of bonus issue — to plough back into business the profits as well as to enable cash-strapped but profitable companies to reward their shareholders. Bonus shares were never meant to be issued to compensate the investors for the high premium charged, though admittedly our company law as it stands does reinforce this impression.

It is strange that the company law has skirted the issue of generation of share premium. The omission should be filled without any further delay because of the following two reasons:

The law should not put the cart before the horse. Generation of surplus comes first, its usage later.

Premium today forms, in the instant case, on a rough reckoning an average of 4000 per cent of the nominal value of shares.

Need for track record

The law should expressly provide for payment of the same premium by promoters which the company proposes to extract from the public in a public issue if the company has no track record of profits.

This is the least it can do if only to pre-empt the clamour for reversion back to dirigisme from a vast majority of investors simmering with discontentment over the present permissive regime.

Second, the law must be amended to prohibit companies without track record of profits to issue bonus shares. This would call for amendment to Section 78 in particular.

(The author is a Delhi-based chartered accountant.)

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