Reliance Power Ltd with Anil Ambani at the helm did the unthinkable in 2008 — issued bonus shares even before the ink had dried, as it were, from the share certificates freshly printed on successful completion of its IPO.

The unexpected generosity was admittedly a penance on the part of the company for pitching the IPO offer price too high, at Rs 450. Listing losses stared retail investors in the face, with the initial quotations being in the region of Rs 380 or so.

The company acted swiftly and doused the fire with an offer of 2:5 bonus to everyone, including the promoters, with the idea of bringing the average cost of acquisition to the new investors close to the market price. But the trick was not lost on the purists and pundits.

No company in the annals of company law had ever issued bonus shares without starting its business, leave alone without making profits. But to Reliance watchers, the sleight of hand wasn’t new.

The Reliance patriarch and founder Dhirubhai Ambani, in the eighties, did the original unthinkable — converting non-convertible debentures into equity — with the government of the day winking at the Houdini act. The conversions spared Reliance of the huge, successive and relentless burdens of redemption.

SEBI’S INTENT

It is now market regulator Securities and Exchange Board of India (SEBI’s) turn to tweak the rights and bonus norms, but one must concede that there is nothing sinister about the exercise.

On the contrary, altruism is writ large on the SEBI move to allow promoters to bring their stake to 75 per cent or less through selective issue of bonus shares and rights offers.

In a country where preferential allotments have been to benefit the promoter groups, SEBI has brought a whiff of fresh air by allowing the preferential allotment route to benefit small shareholders.

Under company law, rights issue is the norm and preferential issue the exception. But over the years, the exception has become the norm, with companies preferring to make preferential allotments to QIBs (qualified institutional buyers) under the QIP (qualified institutional placements) route, and not uncommonly to the promoters in saddle to enable them to beef up their control on the company and fight incipient takeover attempts.

Although SEBI says its move is for rights issues, in fact, it is meant for preferential issues, favouring small shareholders and others not belonging to the promoter group. But when the regulator’s heart is in the right place, one should not be a pedant and indulge in legal hair-splitting.

Bonus issue advantage

While SEBI’s move on rights issue would pass muster under Section 81 of the Companies Act, one is not sure about its move on the bonus front. Section 205 allows companies to make bonus issues but does not seem to allow latitude for being selective.

The difference between rights and bonus thus is two-fold — bonus is offer of shares gratis whereas rights is concessional vis-à-vis the market price; secondly, there is no latitude available for a company to make a selective bonus offer.

It is perhaps here that the SEBI is on a weak wicket because its move requires an amendment to the Companies Act. Perhaps, it would persuade the Ministry of Corporate Affairs to issue an ordinance when Parliament is not in session, to get over this legal hurdle.

But this legal hurdle must be overcome, because unless the decks are cleared, companies wanting to bring down the promoters’ stake to 75 per cent or less would be left either with the rights option, or offer of sale option under which the promoter unloads his excessive shares to the public — both requiring protracted compliance and other activities, unlike the bonus route that is devoid of impediments and delays.

There is no guarantee that the rights or offer of shares by the promoter would be a success given the investor resistance to, and disillusionment with, the primary market.

But the small investor is not going to say no to bonus offers, coming as they do free. In companies such as Wipro and DLF, where the promoters’ stakes are a whopping 80 per cent or so, a bonus issue might be just what the doctor has ordered, given the relatively smaller number of shares to be offered to non-promoter shareholders.

The dilution in net worth and market price of the shares in the event would be marginal.

The market regulator in any case needs to be lauded for tweaking the law in favour of the non-promoter shareholders, given the fact that in this country all the tinkering has been done for and by the promoters in the saddle.

The spate of bonus issues might rekindle the small investors’ interest in equity.

In fact, selective issue of bonus shares to a relatively small segment of shareholders as putatively described above with respect to Wipro and DLF, would be immensely rewarding to them, unlike an across-the-board issue.

In an across-the-board issue, a pre-bonus quotation of Rs 1,000 is likely to crash to Rs 500, post 1:1 bonus ceteris paribus leaving the shareholders bemused.

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

(This article was published on August 17, 2012)
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