G. K. Kapoor discusses a CA Final model paper on corporate laws and secretarial practice

G. K. Kapoor

XY & Co. Ltd has resolved to make a rights issue of 1:1. Mr Bright, a non-resident Indian who is already a holder of 2 per cent of its share capital, sends his application for getting those rights shares. Advise the company in view of the provisions of FEMA, 1999.

The provisions regarding acceptance of deposits from NRI/PIOs, and so on, are contained in Foreign Exchange Management (Deposits) Regulations, 2000 (as amended by Notification No. GSR 494 (E) dated July 10, 2004). These regulations provide as follows:

Deposits under various permissible accounts/schemes can be maintained with the authorised banks in India.

A company registered under Companies Act, 1956 or a body corporate created under an Act of Parliament or State Legislature shall not accept deposits on repatriation basis from a non-resident Indian.

It may, however, renew the deposits which had been accepted on repatriation basis from a non-resident Indian subject to terms and conditions mentioned in Schedule 6.

Deposits on non-repatriation basis may be accepted subject to the following conditions:

i) The deposits are received under a public deposit scheme.

ii) If the deposit is accepted by an NBFC, it should have required credit rating as stipulated under the guidelines issued by the Reserve Bank for such companies.

iii) The amount representing the deposit is received by debit to NRO Account only provided that the amount of the deposit shall not represent inward remittances or transfer of funds from NRE/FCNR(B) accounts into the NRO account.

iv) If the deposit accepting company is an NBFC, the rate of interest payable on deposits shall be in conformity with the guidelines/directions issued by the RBI for such companies. In other cases, the rate of interest payable on deposits shall not exceed the ceiling rate prescribed from time to time under the Companies (Acceptance of Deposit) Rules, 1975.

v) The maturity period of deposits shall not exceed three years.

vi) The company accepting the deposits shall comply with the provisions of any other law, rules, regulations, orders issued by the Government of India or any other competent authority, as are applicable to it in regard to acceptance of deposits.

vii) The amount of aggregate deposits accepted by the company shall not exceed 35 per cent of its net owned funds.

viii) The payment of interest net of taxes may be made by the company to the depositor by remittance through an authorised dealer or by credit to the depositor's NRE/FCNR(B)/ NRO account as desired by him.

ix) The amount of deposits so collected shall not be utilised by the company for re-lending (not applicable to a Non-Banking Finance Company) or for undertaking agricultural/plantation activities or real estate business or for investing in any other concern, firm or a company engaged in or proposing to engage in agricultural /plantation activities or real estate business.

x) The repayment of the deposit may be made by the company to the depositor by remittance from India through an authorised dealer or by credit to the depositor's NRE/FCNR(B) account maintained with an authorised dealer in India provided the depositor continues to be a non-resident at the time of repayment.

xi) The amount representing repayment of deposit may also be credited to the depositor's NRO account, at the depositor's option.

Bonus shares

THE following information and figures are noticed from the annual accounts for the year ended March 31, 2004, of MNP Ltd, a listed company:

i) Authorised share capital Rs 10 crore, comprising one crore equity shares of Rs 10 each.

ii) Paid-up share capital of Rs 4.5 crore, comprising 40,00,000 equity shares of Rs 10 each fully paid-up and 10,00,000 equity shares of Rs 10 each called and paid up to Rs 5 each. The total paid-up capital is paid-up in cash.

iii) Securities premium account, Rs 10 crore.

iv) 2,50,000 fully convertible debentures of Rs 100 each. These debentures are due for conversion on June 30, 2004, in full and fully paid equity shares of Rs 10 each in the ratio of two equity shares for one debenture.

v) General reserves, Rs 5 crore.

vi) Fixed asset revaluation reserves, Rs 2.5 crore.

It was further ascertained that the partly paid shares were made fully paid by June 30, 2004.

The directors of MNP Ltd propose to issue bonus shares in the ratio of 1:1.

Advise the directors on the matter with reference to the guidelines issued by SEBI on bonus issue. What will be your advice, if the company has defaulted in the matter of payment on interest on fixed deposits?

The question requires the candidates to state and apply SEBI guidelines with respect to issue of bonus shares, which are as follows:

a) The bonus issue shall only be made out of free reserves built out of genuine profits or share premium collected in cash only.

However, SEBI guidelines relating to debentures provide that Debenture Redemption Reserves shall be considered as general reserve for consideration of bonus issue proposals.

b) Reserves created by revaluation of fixed assets are not to be capitalised.

c) The declaration of bonus issue, in lieu of dividend, is not made.

d) The bonus issue is not made unless the party-paid shares, if any, existing, are made fully paid-up.

e) The company: i) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof, and ii) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus, and so on.

f) A company which announces its bonus issue after the approval of the board of directors must implement the proposal within six months from the date of such approval and shall not have the option of changing the decision.

g) There should be a provision in the Articles of Association (AoA) of the company for capitalisation of reserves, and, if not, the company shall pass a resolution at its general body meeting making provisions in the AoA for capitalisation.

h) Consequent to the issue of bonus shares, if the subscribed and paid-up capital exceed the authorised share capital, resolution shall be passed by the company at its general body meeting for increasing the authorised capital.

i) No bonus issue shall be made which will dilute the value of rights of the holders of debentures convertible fully or partly.

In other words, no company, may, pending conversion of FCDs/PCDs issue any shares by way of bonus, unless similar benefit is extended to the holders of such FCDs/PCDs through reservation of shares in proportion to such convertible part of FCDs/PCDs.

The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the bonus issues were made.

Looking to the facts of the case, total paid-up capital is Rs 5 crore and equity resulting out of conversion of debentures will be another Rs 5 crore.

Authorised capital being Rs 10 crore, bonus will be within the specified authorised capital and assuming that Articles contain a permissive clause, board of directors shall be empowered to issue bonus shares in the ratio of 1:1 since the amount standing to the credit of General Reserves and Share Premium Account is Rs 25 crore, which is more than the required amount of Rs 10 crore.

However, if the company has defaulted in payment of interest on fixed deposits, SEBI guidelines forbid the issue of bonus shares till the default is made good.

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(This article was published in the Business Line print edition dated April 18, 2005)
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